Pennant disappoints – but there are reasons to stick around

Pennant International (PEN:27p), a provider of Oracle-based software that reduces the support cost of maintaining major assets such as trains, tanks or aeroplanes, is starting to see a material increase in activity in its key markets.

Pennant provides software and integrated product support solutions to a blue-chip client list of original equipment manufacturers and governments, as well as supplying complex training products to a prestigious global client base, the majority of which work in the world’s defence ecosystem. So, with the global defence sector strong, the company is seeing rising bid volumes. In fact, in response to customer tenders and requests for proposals, Pennant quoted on more than £32mn of business opportunities in the past six months.

The issue is that order conversion is taking longer due to extended customer procurement timeframes. So, although Pennant is actively progressing several material sales prospects that should result in new orders in the second half of the year, analysts are taking a conservative approach to their forecasts.

This explains why house broker WH Ireland lowered its 2024 revenue estimate from £16.1mn to £14.8mn. On this basis, analyst Nick Spoliar forecasts current-year adjusted pre-tax profit of £1.2mn (a downgrade from £1.6mn), albeit he also expects 2023 pre-tax profit to have increased sixfold to £1.3mn on 13 per cent higher revenue of £15.5mn when Pennant reports annual results in early June 2024. That said, with £0.25mn of cost savings anticipated in the current financial year, Spoliar views his forecasts as conservative.

Moreover, with the new version of Pennant’s high-margin innovative logistics support analysis software released in the past fortnight, there is potential for a greater share of earnings from this activity in the business mix. That’s important given that Pennant earns a 90 per cent gross margin on software licences, and additional recurring revenue from maintenance strands.

Pennant’s share price fell 13 per cent after the trading update and the shares are now rated on modest prospective price/earnings (PE) ratios of 7.7 (2024) and 8.4 (2025), multiples that suggest potential for upside. So, although the shares are well below the price (36p) at which I suggested buying at last autumn (‘A software provider with a potential 80% upside’, 28 September 2023), I would not be selling out at this depressed level. Hold.

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