Maiden interim results from recently listed RC Fornax suggest the engineering firm’s shares should be avoided until they have fallen by at least a third.
The company raised £5m in an AIM IPO in early 2025 with plans to disrupt the defence sector solutions market. Unfortunately for investors, there is little sign of any major disruption of the market by the company in the half-year results to 28th February.
Revenue for the period grew just 8% compared to the same period last year.
Given that the company was founded in 2020 and has ample time to establish its presence in the marketplace, its growth rate suggests slow demand for its services. It also raises doubts about its ability to justify current rich valuations.
Slow top-line growth should be a major concern for investors, given the market in which RC Fornax operates. Other defence-related shares have seen sales boom in recent years as geopolitical tension bolsters defence spending by countries globally. Despite these strong tailwinds for the sector, RC Fornax revenues grew just 8%.
In addition to slow top-line growth, RC Fornax has very tight operating margins with revenue of £3.8m leading to just £600k in operating profit. Profit for the period was just £460k.
The outlook wasn’t bad, and the company believes it will meet expectations for the full year.
However, the share price requires the company to exceed expectations to justify the rich valuations. Assuming the company generates around £1m in profit this year, the current RC Fornax share price means the company is trading at around 21x earnings.
This isn’t overly expensive for a high-growth company. However, RC Fornax is not a high-growth company. Results demonstrate this.
For RC Fornax to trade in line with the wider market and on a similar forward multiple as other companies producing the same level of growth, shares must drop by at least a third.
The company has come to the market and provided investors with very little reason to be optimistic. RC Fornax has put little effort into investor engagement post IPO and seems content with meagre growth.
Cavendish has a 61p target for RC Fornax shares. This looks to be wildly optimistic.