The purpose of this article is to share my own thoughts and is in no way intended as advice. These are my own opinions and I am receiving no remuneration from any parties in relation to this. I hold shares in my own name for transparency.
Company Name: Falanx
Market Cap: £11 mil
Share Price: 4.3p
We await Falanx to give a market update on their annual accounts for the financial year 31st March 17 – 18 and a company update informs us figures are due to be released on the 14th August. I’d like to look at the reasons I believe make Falanx a very strong investment opportunity. The company set out an objective to be EBITDA breakeven in financial year 17/18 and they have re-iterated in the interims that they are on track to do so. Given then number of recent deals that have been announced from the tail end of 2017 through to now, which further strengthen this likelihood, I have been quite surprised by the subdued market reaction to the share price for a company about to go into profitability in such a red hot and expanding sector.
I expected the annual results to be out in July I and accept that there are valid reasons for this but I do wonder if the company will release other significant news between now and the annual results in August, but that remains to be seen.
Falanx describe themselves as a managed security services business. So not only providing a software solution but also delivering a full consultancy service to both new and existing clients both at the outset and on an ongoing basis. This helps the customer understand what the potential threats are to their business and how well equipped they are to deal with any existing or new threats that may appear. The consultancy services offered by Falanx (assess, consult and response unit) runs at a profit margin of 25%-30%.
Falanx have built a proprietary technology called midGARD which monitors its customers cyber security around the clock. This is how it was described in the RNS detailing its launch.
‘MidGARD is a leading-edge cyber threat detection and response platform. MidGARD replaces existing Security Operations Centres (SOCs) and security information and event management (SIEM) software with a multi-client cybersecurity ecosystem that processes the increasing accumulation of event and log data – millions of events per second – by using mass real-time stream processing. It uses the latest big data and machine learning tools to review a maelstrom of potentially informative data to identify the latest cyber threats.’
This is the real money spinner for the company as it generates a whopping 70% margin and is therefore the companies flagship asset. These contracts can have a value up to circa £1mil so are hugely profitable. midGARD was only introduced to the market in the middle of September 2017 so if the company can achieve breakeven in the accounts about to be released then I see that as a very positive indication of things going forward and I’d like to see a punchy projection going into 18/19. Falanx have identified that midGUARD had certain limitations for much larger companies and are about to launch a second version for this market and I’m very intrigued to see how this will be priced. Here is how it’s described in the RNS on 16th May.
Falanx Technologies – Next Generation Development
Since the completion and launch of our MidGARD service, work has been underway on the next generation of Falanx technology. The MidGARD service has always been aimed at addressing the cyber security needs of SME’s and was never designed to address the significantly larger scale challenges of FTSE and NASDAQ 250 type companies.
Encouraged by the early success of MidGARD, our focus since has been on taking our technology development forward in a way that is accessible to these massive organisations with sophisticated internal cyber security teams and infrastructure. All of which have little or no appetite to outsource their security requirements to a managed service.
Under the leadership of Dick Morrell, Falanx Group, CTO the Falanx Technologies team is now in the final stages of creating our new, innovative and openly accessible security software “stack” that will be released this summer. Initially to a global early adopter programme of DevOps teams within major commercial organisations who manage their own cyber security.
Cloud ready, out of the box, this technology ‘stack’ can be used in almost every industry vertical and is envisaged to displace hugely expensive licensed monitoring technologies. It will also simplify the complex and expensive data management and architectural issues that often eat millions of pounds of code and time and is expected to be significantly disruptive in the enterprise space.
Dick Morrell, chief technical officer, has been on social media speaking very bullishly about how good this technology development is. Dick seems to be seen as an oracle in the cyber security industry and I get the impression his decision to join Falanx has been a major coup for the company. Given the target market for this development is major organisations, this could be a transformational development for Falanx which could make the current market valuation totally ridiculous. I expect there to be a bit of media activity around the new tech when launched and I suspect there is quite a bit already going on in the background with potential users. Clearly if the tech is that good then these huge companies will be approaching Falanx and not vice versa. Falanx have some very large companies on their own client bank including UK Government functions, a Global 50 Financial Services firm and one of the ‘Big 4’ actuarial consultancy firms. Organisations like this will conduct significant due diligence so I’m in no doubt there is a quality proposition being delivered.
Falanx raised £4.6 mil in March this year at 4.5p per share. This was to acquire a cyber security company called Firstbase. Unicorn Asset Management took over 12% of the company in the raise and Mike Reid (Falanx CEO) invested a further £300k taking his holding to 3.5% (around £450k on current SP). Mike has bought shares as high as 6.8p, so that gives a strong indication that the management know where this is going.
Firstbase is a penetration testing company so clearly a bit of cross-over with Falanx which will no doubt become streamlined. Given the additional services that Falanx can provide beyond this means there is significant cross selling and upselling already happening and will continue to happen generating valuable cash flow on the bottom line. A lot of these firms will be prime for midGARD or even the second generation about to be launched. Firstbase have in the region of 170 companies it services some of which are listed on the website as having ‘long terms relationships’.
- Amlin Insurance
- Crest Nicholson
- Glencore Xstrata
- Kingfisher PLC
- Lloyds of London
- Mitsubishi Electric
- National Gallery
- National Museum of Science and Industry
- Natural History Museum
- NHBC
- Nominet
- Permira
- Skipton Building Society
- Sumitomo Mitsui Banking Corp
- Thales
- UKAR (Bradford & Bingley)
- University College London Hospital
- Universal Music
- Wm Morrison Supermarkets
- Yara International
There are some significantly sized companies in here and I can only imagine a number of new contract wins will be announced sooner rather than later. I’m fairly certain it won’t be the last acquisition we will see based on Mike Reids strategy of building shareholder value through acquisition ‘roll up’ strategy of fragmented and expanding sectors. He has proved this successful in previous ventures such as Pipex which was sold for £300 mil under his leadership.
I’m not concerned if the company breakeven this year, although I believe they will. What I’m more excited about is the company projection going into the year 18/19 given all the points I’ve discussed above. This should draw a firm line under the SP and should give the market confidence that the company is firmly on the right path to success. The company have arranged an investment analyst meeting right on the morning of the results being released in August and I believe the company must have a lot of positives to talk about otherwise why would they bother.
Moving into profitability in a sector with a P/E ratio well into double digits this doesn’t sound like a company that’s going to be sticking around these levels for long. A re-rate must surely be on the cards.
Honest Investor 