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Four "wannacry" plays to consider from Hybridan Research

Many companies in the cyber-security sector trade on stratospheric earnings multiples

The world of cyber-security is an arms race

Small cap specialist Hybridan Research has been pondering which stocks might benefit from renewed concerns over cyber-security following the “wannacry” virus attack.

Its first piece of advice when sizing up cyber-security firms is to throw the usual valuation metrics out the window.

Many companies trade on stratospheric earnings multiples, so it is no good looking for a company that is cheap based on the numbers it has produced in the past.

The valuations are all based on the potential bonanza awaiting a company that gets its software integrated into the network infrastructure of corporate giants, after which the lolly rolls in year after year.

For Hybridan, picking the winners is all about identifying the innovators.

The broker also advises at looking at the management team.

“How many industry heavyweights are on board? Have they been in the sector for a long time?” are two questions investors should ask.

“The landscape is incredibly competitive and you need the right people to open the right doors. Customers and investors highly rate the benefits of having experienced management on board that are capable of generating business,” Hybridan argues.

It is also important for a company to have more than one string to its bow. “One hit wonders will fail in this market,” Hybridan asserts.

“Innovation is paramount here as companies need to be one step ahead of the hackers.  Does the company have a consulting arm?  Cybersecurity is a deeply cultural issue for organisations and they need help implementing and using certain products and techniques to defend against a potential threat,” according to Hybridan.

On the other hand, having the best technology is not much use if nobody knows about it, so the company has to get the balance right between commercialisation and innovation.

In other words, sales need to finance costly research & development.

Hybridan names a handful of stocks that it thinks are worth a closer look: Osirium Technologies (LON:OSI); ECSC Group (LON:ECSC); Falanx (LON:FLX); and Crossword Cybersecurity (AQSE:CCS).

Osirium floated on Aim in April at 156p and is focused on being the dominant cyber-security brand in the UK by 2018.

Hybridan says software-as-a-service (SaaS) revenues are “going in the right direction”.

ECSC also floated in 2016, and since it did so in December its performance has been fantastic, Hybridan said.

Investors who participated in the initial public offering (IPO) are sitting on gains of around 220%.

The company was founded by a former adviser to GCHQ, the UK government’s communications monitoring arm

“ECSC has a solid mix of product and consulting revenues with some 200 customers representing 10% of the FTSE 100,” the broker admits, but goes on to say the company needs to meet some impressive growth targets to help justify the current market capitalisation. 

Falanx made a wise move to refocus on cyber-security from its grass roots as a private security business, in Hybridan’s view.

“Shares have responded well, up over 100% over the past 12 months demonstrating the progress they have made in the field,” the broker noted.

The company’s “Security-As-A-Service” platform went live in March 2017 which has the potential of generating significant recurring revenues going forward.

Crossword, Hybridan claims, is at the forefront of cyber-security innovation as it looks to commercialise world class intellectual property coming out of universities.

It’s a company Hybridan knows well, as it is the house broker.

It certainly ticks the box of having an industry heavyweight on board, in the form of Sir Richard Dearlove, the most inappropriately named “spy” ever, who was formerly head of MI6, or the Secret Intelligence Service as it is known.

Quick facts: ECSC Group PLC

Price: 67.5 GBX

Market: LSE
Market Cap: £6.76 m

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