SMALL CAP IDEA: Which London-listed cybersecurity firms stand out?

Though cybersecurity is an underserved niche in the London equities scene, a few companies are emerging as enticing investment plays in this exponentially growing and evolving technology sub-sector.

Take Crossword Cybersecurity (8.5p). If you ask Crosswords’ chief executive Tom Ilube, the group is on a ‘firm and deliberate path’ to profitability in 2024, all through organic growth no less.

Hyperbole aside, an £8million revenue target is set for the 2024 financial year, supported by a focus on higher-margin business segments driven by, you guessed it, generative AI.

Interim financial results posted at the tail end of August certainly provided a confidence boost for Ilube, with Crosswords on track to meet market expectations for 2023 (i.e. £6million in revenues).

A clunky metric though it may be, but Crosswords’ 2024 revenue forecast implies a price-to-sales ratio of less than 1:1 given its current market value of £7.7million.

Safe investments: Though cybersecurity is an underserved niche in the London equities scene, a few companies are emerging as enticing investment plays

Stacking this up against FTSE 250 cybersecurity benchmark Darktrace, whose forward-looking sales multiple is something in the range of 4:1, and there’s clearly a perceivable mismatch here.

Crosswords believes it can go break even on an underlying basis, or EBITDA neutral in the jargon, in 2024, though the market expects losses of a little over £1million.

Regardless, given the group posted over £4million in EBITDA losses in 2022, there is undoubtedly a clear path to underlying profitability being paved.

Ilube mentions that Crossword’s cost base is expected to stay flat as revenues go up, so that’s something to consider on the margin front.

Crossword has taken its finger off the acquisition button to focus on strengthening its relationships with its big-ticket clients, including FTSE 250-listed companies. Its growth story is going to be a tantalising one.

Too early in the growth phase for you?

BATM Advanced Communications is a £127million small-cap cybersecurity play (28.9p) gaining more and more attention among the City’s equities researchers for its strong progress in 2023.

BATM is a more diverse beast than Crossword, given its broader offerings in telecoms and even the medical technology sector.

Right now, BATM’s combined networking and cybersecurity segment comprises less than a quarter of its total turnover.

Yet under chief executive Moti Nagar, BATM has made significant inroads into cyberspace through some notable government contracts.

Listed on the main segment of the London Stock Exchange, BATM last week inked a US$3.4million (£2.7million) contract with a customer in the government defence department.

That was just a nifty top-up to the US$26million cybersecurity order signed back in January.

‘As governments and companies face increasingly pervasive cyber security threats from a broad range of actors, we expect to continue to receive more orders for our cyber products and demand to remain strong as we progress through 2023 and beyond,’ BATM chief executive Moti Nagar said of the contract wins.

BATM is already EBITDA positive, as supported by its broader service lines, but there’s no escaping the fact that cyber is seen as a real forward driver.

Hence one corporate broker called BATM stock a ‘profitable high-growth opportunity to investors’.

Firmwide revenues for the next financial year are tipped for US$153million (£123million), which, low and behold, also gives BATM barely a 1:1 price-to-sales ratio at its current market value.

Though these cybersecurity plays are ostensibly cheap compared to the competition, ratios are only worthwhile if there are fundamentals to support them.

Consensus says that cybersecurity is only becoming more important as geopolitical tensions manifest, posing a threat to UK plcs’ bottom lines (just ask Capita).

‘Cybersecurity is going to go through the roof over the next few years, as the impact of GenerativeAI transforms business,’ said Ilube.

‘Attackers will be supercharged by AI, so companies need to gear up and use AI to defend themselves.

‘It’s a whole new attack surface. That’s why Crossword and our clients are going deep into the impact and opportunity for GenerativeAI on cybersecurity.’

Nagar stated that ‘the threat to government communications and the networks of companies and organisations is going to come from the rapid growth of computing power that is happening currently’, making cybersecurity solutions that protect these networks in ever higher demand.

Sadie Creese, professor of cybersecurity at the University of Oxford, spoke of a ‘gathering cyber storm’ at Davos this year. ‘This storm is brewing, and it’s really hard to anticipate just how bad that will be,’ Creese foreshadowed.

Fear mongering aside, there is no getting around the fact that cyber attacks are on the up.

Matthew Price, chief executive of US cybersecurity blue chip Cloudfare, disclosed that distributed denial-of-service (DDoS) attacks alone have increased 79 per cent year on year.

‘There’s been an enormous amount of insecurity around the world,’ Prince told the Davos crowd. ‘I think 2023 is going to be a busy year in terms of cyber attacks.’

Perhaps it’s time to bolster your firewall – and investment portfolio – accordingly.

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This post first appeared on Dailymail.co.uk