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  • Writer's pictureMark Watson-Mitchell

Cyber 2021 - some small cap stocks

As the various ‘top topics’ of last year begin to fade I think that one problem area is going to offer some very big upside possibilities.

In late February/early March last year it is believed that Russian State-backed hackers infiltrated the workings of SolarWinds, an American software house.

The hackers known as ‘Cozy Bear’ piggy-backed on that company’s software to get into the networks of scores, possibly hundreds, of US government and State departments.

The SolarWind ‘Orion’ software is used by some of the world’s largest companies, as well as major UK operations, including the NHS.

The National Cyber Security Centre, which is part of our GCHQ, has been carrying out its own investigations of such penetration by Cozy Bear in our country.

Cyber security, which I believe will become a big market buzz in 2021, is the practice of protecting computer systems, networks and programmes from damage, unauthorised access or even being made inaccessible.

One thing that we learned last year was ‘WFH’ – work from home.

Today ours is a technology connected world, and it is at our fingertips, whether on our desktops, in our laps, on our televisions or through our smart phones. Today there are more devices than people.

It is not just the corporate or governmental worlds that require help, but also private individuals that are needing similar assistance.

In their many forms cyber attacks are certainly increasing at quite a pace and at growing levels of sophistication.

In the UK Small-Cap Sector we have quite a number of growing companies operating within the ‘cyber world’. From those I have initially selected four companies that are well worth research and consideration.

Corero Network Security (CNS) – 9.5p, mkt cap £47m.

This company is a global leader in providing real-time, high performance, automatic DDoS defence solutions. Its award-winning cybersecurity technology helps to eliminate the threat of Distributed Denial of Service to digital environments by way of automatic attack detection and then mitigation.

Despite its small size, it is continuing to win customer orders across the world and is determined to grow this year.

Allenby Capital in a recent TMT note stated that ‘there was definite evidence of commercial traction with the number of new customers secured, as well as additional spend from existing customers.’

Analyst Simon Strong at Cenkos Securities rates the shares as a Buy, noting that ‘the current rating is not commensurate with the current growth rate being delivered by the stock.’

Crossword Cybersecurity (CCS) – 275p, mkt cap £14m.

This tiddler was involved in developing and then commercialising university research-based cyber security and risk management software. However, it is now focussing more upon its product development, as well as its cyber security consulting.

Its aim is to build up a portfolio of revenue generating, intellectual property based, cyber security products. The group’s most recently launched product, NixerCyberML is a new tool for businesses that want to solve advanced security and cybercrime problems, such as detecting and dealing with compromised accounts, fraud, and in the application denial of service attacks.

In a note on the group’s interim results analyst Derren Nathan at Hybridan agreed with its approach of developing its current validated product range, which has multiple Blue Chip and Top Tier partner agreements in place, rather than deploying funds into earlier stage projects.

The company will be announcing its Trading Update for the year to end December 2020 on 10th February.

Kape Technologies (KAPE) – 186p, mkt cap £385m.

This company is already making big inroads into the cyber security sector. Although based in the Isle of Man it markets its privacy and security products globally and currently has over 2.4m subscribers helping to boost its annual recurring revenues.

Its aim is to ensure that every individual has a private sphere, a safe digital space in which to operate. The company offers products which provide online security, privacy and optimal online experience.

Analysts Gareth Evans and Ian Poulter at Progressive Equity Research in a mid-December note declared that the group’s launch of its CyberGhost Privacy Suite solution was an important milestone. They believe that it will ‘improve user engagement and retention, driving revenue and profit in the long term.’

N+1 Singer were impressed by the group’s latest fund-raising for $100m, being heavily oversubscribed and actually raising $115.5m.

The company is due to announce its end December 2020 finals Trading Update later this month.

Shearwater Group (SWG) – 152p, mkt cap £36m

Organisational resilience – that is how this group describes the base of its services and solutions.

It provides cybersecurity, advisory and managed safety services to help and secure businesses in the connected global economy. Protection of assets and infrastructure, together with operational support is what it provides its global customers.

Despite Covid-19 hitting the group earlier in its last year, the group recently announced that its Q3 trading has been very buoyant showing revenues in October and November last well ahead of the previous year. It continued that momentum into December, leading the company’s management to expect to reduce its year-on-year revenue deficit, while its profit expectations for the year remaining on track.

Cenkos Securities rate the shares as a Buy. Analyst Simon Strong comments that ‘first half order deferrals are now materialising and renewals are positive. Free cash generation was strong and the outlook is positive. We see no fundamental reason for the recent share price underperformance and we reiterate our Buy recommendation.’

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