# Pennant International well positioned for second half

- Link: https://www.directorstalkinterviews.com/pennant-international-well-positioned-for-second-half/4121023875
- Published: 2021-09-22T08:42:10+01:00
- Author: Giles

**[Pennant International Group plc](https://www.directorstalkinterviews.com/company/pennant-international-group-plc/pen.l)**(
[LON:PEN](https://www.directorstalkinterviews.com/company/pennant-international-group-plc/pen.l)),
a leading global provider of training technology and integrated product support 
solutions, announced today its Interim Results for the six months ended 30 June 
2021.

> **Commenting on the results, Chairman John Ponsonby said:**
> “The Half Year results mask a particularly encouraging performance from the Group’s
> IPS division, while the decisive actions taken last year to reduce costs resulted
> in significant savings during the First Half, positioning the Group well for the
> second half and into 2022.”
> “I would like to thank all Pennant employees, who have worked tirelessly during
> the First Half, drawing on Pennant’s long heritage to deliver our impressive breadth
> of products and capabilities.”

**Key points: Financial**

·      Group revenues for the Period of £7.4 million (H1 2020: £6.3 million);

·      gross margin of 21% (H1 2020: 18%);

·      EBITA loss of £1.0 million (H1 2020: loss before interest, taxation and amortisation
of £2.5 million);

·      loss before tax of £1.7 million (H1 2020: loss before tax of £3.2 million);

·      savings implemented during 2020 now being realised, with administration costs
for the Period of £3.2 million against £4.3 million for the first six months of 
2020 (NB: H1 2020 administration costs included £0.5 million of non-underlying costs);

·      net cash generated from operations of £0.2 million (H1 2020: cash generated
from operations of £4.5 million);

·      net debt at Period end of £1.9 million (H1 2020: net cash of £2 million);

·      trade and other receivables of £3.7 million (H1 2020: £3.7 million);

·      basic (loss) per share of (4.64)p per share (H1 2020: basic (loss) per share
of (8.88)p per share);  

·      unrelieved tax losses of £4.5 million carried forward (H1 2020: £2.8 million).

**Key points: Operational**

·      Expansion of Integrated Product Support business, with new customers in new
sectors: commercial aviation and private space exploration;

·      commencement of internally-funded development of Omega PS successor product(
redesigned to ensure legacy, current and future LSA standards are quickly and easily
supported, with a modern, easy to use interface);

·      enhanced operational footprint in Australia and United States to deliver 
software and consultancy programmes;

·      critical design review successfully passed on UK Helicopter trainer programme,
on time and on budget;

·      after significant Covid-19 related delays, successful installation and commission
of generic training devices in Qatar, enabling revenue to be recognised;

·      completion of build and factory acceptance on products for second Middle 
East customer, ready for delivery and installation in the second half;

·      continuing challenges on the MTE Programme negatively impacting the financial
performance of the Technical Training business;

·      the appointment of John Ponsonby as Chair.

> **Commenting on the Pennant International Group prospects, John Ponsonby added:**
> “Looking forward, there is much reason for optimism. Recent industry engagements(
> such as at the DSEI trade show), and the forging of new partnerships with OEMs
> and other complementary companies,  have firmly highlighted that our customer 
> community is highly positive about the Group’s approach to technological innovation.
> We are invested in continuous innovation for both the TTD and IPS product ranges(
> as evidenced by the commencement of the development of the OmegaPS successor product),
> and have a pipeline of sales opportunities across the globe. 
> After a challenging First Half, we are pleased that the Company remains on course
> to meet expectations for the year. The Board is committed to delivering the Group
> Strategy and is keenly focussed on improving Group performance in 2022. 
>  
> Whilst the last two years have been extremely challenging to all in the Group,
> the Board is confident that the Group’s long-term prospects are positive and I
> look forward to updating shareholders further in due course.”

**Chairman’s Statement**

On behalf of the Board of Directors, I can report that the Group recorded a pre-
tax loss for the six months ended 30 June 2021 of £1.7 million (H1 2020: pre-tax
loss of £3.2 million).

I would like to thank all Pennant employees, who have worked tirelessly during the
First Half, drawing on Pennant’s long heritage to deliver our impressive breadth
of products and capabilities. 

**Results and dividend**

Revenues for the Period were higher than the equivalent period in 2020 at £7.4 million(
H1 2020: £6.3 million).

This increase was largely attributable to generic products achieving acceptance 
events and progress on engineered-to-order programmes in the Technical Training 
division, combined with strong performance in the Integrated Product Support division.

The gross profit margin for the Period was 21% (H1 2020: 18%) due to the sales mix
and the significant proportion of revenues attributable to the MTE Programme (which
is trading at a low margin). It is anticipated that gross margin for the year as
a whole will be in the region of 30%.

Administrative costs for the Period reduced to £3.2 million (H1 2020: £4.3 million),
following management’s comprehensive costs review carried out during 2020 which 
achieved annualised savings of circa £1 million. It should be noted H1 2020 administration
costs included £0.5 million of non-underlying costs (£0.4 million restructuring 
expenses and £90k aborted transaction costs).

The Group ended the Period with net debt of £1.9 million (H1 2020: £2.0 million 
net cash), reflecting the scheduled cash outflows from materials purchasing and 
production activities during the Period.

Total assets at Period end were £20.6 million (H1 2020: £21.3 million).

The basic loss per share for the Half Year was (4.64)p compared to a loss of (8.88)
p for the same period last year.

A minimal effective tax rate is expected for the full year due to unrelieved tax
losses of £4.5 million carried forward at the Half Year (H1 2020: £2.8 million) 
and with R&D tax credit claims in progress.

The Group’s three-year order book reduced during the Period ending at £26 million(
H1 2020: £36 million) which is scheduled for delivery as follows: £7.2 million in
H2 2021, £8.7 million in 2022, £7.8 million in 2023 and the balance in H1 2024. 
Order intake during the Period was at relatively low levels, not least due to reduced
customer procurement activity induced by the Covid-19 pandemic and, in the UK, the
completion of the Integrated Review of Security, Defence, Development and Foreign
Policy. Further detail is provided in the ‘Technical Training division’ segment 
of the review below.

The Directors have concluded that it is in the best interests of the Company and
its shareholders to retain cash at this time for expected working capital requirements,
particularly given the ongoing pandemic. The Board will therefore not be declaring
an interim dividend but will continue to review the Group’s dividend policy based
on performance, cash generation and working capital and investment requirements.

**Divisional Performance & Operational Commentary**

**Integrated Product Support (IPS) division**

**Overview**

The Group’s IPS business develops and supplies Pennant’s two proprietary software
product suites, OmegaPS and R4i. OmegaPS is a sophisticated logistics data tool;
R4i provides its users with a dynamic, S1000D-compliant technical documentation 
solution.

In addition, the IPS business provides long-term recurring consultancy, support 
and maintenance services on both software suites to its many customers which include
the Canadian and Australian defence departments and their respective supply bases.

**New Customers, New Sectors**

The Period saw significant market demand for the specialist capabilities of the 
R4i suite, with the S1000D technical documentation standard being utilised on an
increasing number of military and civilian engineering projects. The IPS business
is growing beyond its traditional defence base, with new customers acquired in new
sectors during the Period including commercial aviation and space exploration.

The Group anticipates that demand for these capabilities will remain strong and 
grow, reinforcing the Board’s decision last year to acquire Absolute Data Group,
the company which developed R4i. With the development of an OmegaPS successor product,‘
GenS’ (see below), the Group will be able to provide a cutting-edge, end-to-end 
solution for customers’ data and documentation needs.

The IPS division continues to build its capability to provide complementary services,
particularly in niche capabilities such as S1000D consultancy, where international
demand for specialist skills is strong. In support of this expansion, an enhanced
operational footprint has been established in the United States to deliver these
exciting software and consultancy programmes.

**Product Investment**

Development of GenS, the successor product to OmegaPS, commenced during the Period
with the first software release successfully taking place post Period end.

GenS will represent the next generation of Logistics Support Analysis/Logistics 
Product Data technology, with a modern, easy to use interface and functionality 
deployable ‘on premise’ or as a software as a service. GenS, when combined with 
the R4i S1000D Technical Publishing suite; will transform customers Integrated Product
Support capabilities into a truly integrated digital capability and reduce program
delivery costs.
_**Financial Performance**_

The IPS division’s financial performance during the Period was as follows:

|   | H1 2021£m | H1 2020£m | 
| Revenue |   |   | 
| Products/Licences | 0.4 | 0.3 | 
| Maintenance | 0.6 | 0.5 | 
| Services | 1.6 | 1.7 | 
| Total | 2.6 | 2.5 | 
| Divisional contribution* | 0.4 | 0.2 | 
| Allocation of Group costs | (0.4) | (0.3) | 
| Profit/(Loss) for the Period** | 0.0 | (0.1) |

             * Divisional contribution to Group operating performance prior to allocation
of Group costs

             ** Divisional contribution to Group operating loss after allocation
of Group costs

**Looking Forward**

The division’s pipeline is strong and the Group expects the acquisition of new customers
to continue during the second half and beyond, with multiple opportunities in the
United States, Canada and Australia within the division’s £14 million sales pipeline.

Indeed, post Period end, orders worth £1.5 million have been received for the division’s
software products and complementary services, with the majority of these revenues
realisable over the next 12 months. The division remains ‘on track’ for revenues
of £5.8 million for the full year.

Furthermore, to complement the division’s traditional strength in North America 
and Australasia, the Group will be increasing its focus on the European market to
coincide with the launch of GenS (the first release of which took place post Period
end, with the fully completed product scheduled for launch in late 2022).
 

**Technical Training Division (TTD)**

**Overview**

The Group’s TTD is focused on the design and build of generic and platform-specific
training technologies and the provision of related technical and support services
for the defence, aerospace, rail and other safety critical industries.

Half Year Performance

At present, TTD continues to be the main driver of revenues within the Group. A 
review of key programmes is provided below.

**General Dynamics Contract**

The contract for electro-mechanical trainers for the Ajax armoured fighting vehicle(
the “**MTE Programme**“) was awarded to the Group by General Dynamics in 2015.

The division’s H1 performance was significantly impacted by factors relating to 
the MTE Programme, including:

·      the engineering complexity of emulating a vehicle which itself remains under
ongoing review and development;  

·      deficiencies in the provision of OEM data and dependencies;

·      challenges within Pennant’s own supply chain, including delays and increases
in the prices of parts and materials due to global shortages; and

·      workplace restrictions and residual impacts relating to Covid-19.

Pennant is working closely with General Dynamics to resolve any remaining challenges
and ensure a successful delivery. It is now anticipated that the MTE Programme will
be completed during the first quarter of 2022.  

**UK Helicopter contract**

Delivery of the UK Helicopter trainer programme progressed well during the Period,
with Pennant passing the Critical Design Review (an important engineering and cash
milestone event) on time and on budget.

**Generic Product Sales**

After significant Covid-19 related delays during 2020, various generic training 
devices were successfully installed and commissioned in Qatar during the Period,
enabling associated revenue to be recognised.

The build and factory acceptance of an additional product suite for a second Middle
East customer was also completed during the Period, ready for delivery and installation
in the second half.

 Financial performance for the Period as follows:

|   | H1 2021£m | H1 2020£m | 
| Revenue |   |   | 
| Engineered | 2.7 | 1.2 | 
| Generic | 0.3 | 0.8 | 
| Technical Services & Support | 1.8 | 1.8 | 
| Total | 4.8 | 3.8 | 
| Divisional contribution* | (1.1) | (2.5) | 
| Allocation of Group costs | (0.6) | (0.6) | 
| Loss for the Period** | (1.7) | (3.1) |

             * Divisional contribution to Group operating performance prior to allocation
of Group costs

             ** Divisional contribution to Group operating loss after allocation
of Group costs

**Evolution of TTD**

The Board fully recognises the inherent challenges presented by TTD’s business model:‘
lumpiness’ of revenues and technical risk in delivery, and has a detailed plan to
address these (which aligns with changes in the training market generally).

With the increasing focus amongst training providers on the utilisation of smart
technologies, the Period saw TTD continue its drive to develop, sell and maintain
innovative software-based training solutions including Virtual Reality, Augmented
Reality and sophisticated vehicle platform emulations. Use of such solutions not
only brings cost benefits and safety improvements for the training organisation 
but is also popular with students.

The action plan is to evolve the Group’s TTD offering so that it generates a greater
proportion of its revenues from software and services. As an example, during the
Period, Pennant won a contract to develop a prototype software simulation for a 
major infrastructure organisation which has the potential to generate significant
follow-on sales.

Pennant will still compete to win hardware-based programmes where attractive opportunities
exist. For example, based on market intelligence, the Group is optimistic for the
medium term regarding future sales of its proprietary generic training aids (such
as GenFly and IAMT) in support of aviation training colleges (along similar lines
to the Qatar programme and the 2016 Middle East contracts).

As this repositioning continues, management envisages that TTD revenues may decrease(
as reliance on costly ‘engineered to order’ programmes reduces) but that quality
of earnings (margin and recurrence) will substantially improve.

Opportunities may arise, as TTD evolves, to re-assess the physical and other resources
currently allocated to the division which may enable further costs savings and/or
the re-allocation of capital within the wider business.

**Looking Forward**

The efforts described above to reposition the TTD business can be seen in the division’s
current sales pipeline which, at Period end, stood at approximately £25 million (
excluding the ‘Major Programme’), of which circa 80% comprised opportunities for
software, services and/or repeat build generic products.

In the core UK market, customer procurement activity has slowed due to Covid-19 
and the completion of the Integrated Review of Security, Defence, Development and
Foreign Policy. With the review now completed and published, and Covid-19 fall out
abating, the Group expects to receive further news during the second half from its
prospective customer and/or UK Defence regarding the ‘Major Programme’ which will,
it is hoped, definitively confirm whether a contract is to be awarded, the scope
of supply and ultimate value.

More generally, the Group expects TTD to be a beneficiary of two market factors:
the UK government’s renewed focus on buying British, particularly from Small and
Medium-sized Enterprises (as articulated this year in the ‘Defence and Security 
Industrial Strategy); and the global trend mentioned above towards innovative, technology-
focused and enhanced training.
 

**Outlook**

I am very proud to have been appointed the Company’s Chairman during the Period,
and I have been extremely grateful to all Pennant employees who have worked tirelessly
to achieve Half Year results that represent a sound basis for delivering a much 
more positive second half performance. 

The Half Year results mask particularly encouraging performance from the IPS division,
and the decisive actions taken last year to reduce costs are having a positive impact
which is positioning the Group well for the second half and into 2022.

Looking forward, there is much reason for optimism. Recent industry engagements (
such as at the DSEI trade show), and the forging of new partnerships with OEMs and
other complementary companies,  have firmly highlighted that our customer community
is highly positive about the Group’s approach to technological innovation. We are
invested in continuous innovation for both the TTD and IPS product ranges (as evidenced
by the commencement of the development of the OmegaPS successor product), and have
a pipeline of sales opportunities across the globe. 

After a challenging First Half, we are pleased that the Company remains on course
to meet expectations for the year. The Board is committed to delivering the Group
Strategy and is keenly focussed on improving Group performance in 2022. 

None of this will be possible without the continued support of our employees and
once again, on behalf of the Board, I wish to applaud the commitment of staff across
the Group, who continue to draw on Pennant’s long heritage to deliver our impressive
breadth of products and capabilities. 

Whilst the last two years have been extremely challenging to all in the Group, the
Board is confident that the Group’s long-term prospects are positive and I look 
forward to updating shareholders further in due course. 

J M M Ponsonby
Chairman

Share on: