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Artificial intelligence cyber security company Darktrace has experienced a share price boost since Russia invaded Ukraine.
The theory is that with the emergence of a potential new Cold War there will be an increase in state-funded cyber attacks against US and European companies. The reality is that cyber attacks were rampant even before this new conflict started.
In the two weeks since February 24, Darktrace’s share price jumped by 25 per cent. Results published on March 3 showed that in the second half of 2021, revenue grew 52 per cent year-on-year, helping the company to convert a prior-year operating loss of £4.9mn into a profit of £8.6mn.
The most promising feature of the results was an increase in its annual recurring revenue retention rate from 99.9 per cent to 105.1 per cent, meaning it is selling more services to retained customers.
In a sell note published by Peel Hunt in October last year, the broker pointed to Darktrace’s low customer review score as a reason for caution. However, having an ARR of over 100 per cent suggests that customers are happy enough with the product.
Peel Hunt’s other concern, that Darktrace invests too much in marketing and not enough in R&D, could hold sway in the long run. Research company Gartner has identified 26 different vendors in the same market. If management is not constantly improving the product it could be tricky for Darktrace to capture enough of the market to justify its price to forward revenue ratio of 13.
Director Vanessa Colomar’s recent sale of £5.25mn of shares suggests she might also consider the war-induced jump in value to be a high mark for the company. This sale comes swiftly off the back of her disposal of £9.23mn of shares in November last year — at the end of the IPO lock-up period.
Comparing the quality of products in such a high-tech space is tricky for lay people, but the 50 per cent increase in R&D in the most recent results, coupled with the impressive ARR should comfort those — including Peel Hunt — who thought Darktrace’s main value was just the strength of its brand.
Brand strength should not be dismissed though. If it can be coupled with continuing product improvement, then Colomar’s sale could prove to be ill-timed.
Balfour Beatty bosses buy as building booms
The role that Balfour Beatty’s chief executive, Leo Quinn, has played in a number of company turnrounds was highlighted in our recent feature on picking recovery shares.
Quinn oversaw turnrounds at banknote printer De La Rue and defence company Qinetiq before returning to Balfour Beatty — the company at which he began his career — on 1 January 2015.
At a casual glance, his seven-year spell in charge seems not to have yielded a huge amount in subsequent gains. Turnover for 2021 of £7.2bn is marginally lower than when he took charge and last year’s pre-tax profit £87mn represents a margin of 1.2 per cent. Even in a low-margin business like contracting, this is unspectacular. Its share price performance — up 23 per cent since the month he joined — is also nothing to write home about.
The business has undergone considerable changes, though. It had lost more than £300mn the year before he took charge and another £200mn during his first year at the helm. Although margins have been thin since, the company has at least managed to stay in the black — even throughout a pandemic and a US military housing fraud scandal which cost it $65mn (£50mn) last year (see p.47).
It has exited a bunch of underperforming businesses along the way, including joint ventures in the Middle East and a UK utilities arm serving water and gas markets. It has also built a cash pile that stood at more than £1bn at the end of last year — even after funding £150mn of buybacks. Another £150mn is earmarked for this year.
Quinn and his chair Charles Allen seem confident enough in its prospects — they invested a combined £431,404 in Balfour Beatty shares last week as the company said a strong order book and positive infrastructure markets of scope for profitable growth.
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