Good morning, no preamble today as I'm under the weather. Mark Simpson is here to help with stock coverage.

Overnight market movements:

• The FTSE is down 0.7% at 10,535

• S&P 500 is up 0.7% at 7,705

• Brent crude (December) is down 0.5% at $97.50/bbl

• Gold is up 0.8% at $4,190/oz

• Bitcoin is up 0.8% at $84,300

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Companies Reporting

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Mark’s Section

MS International (LON:MSI)

Up 10% at 1550p (£233m) - 3-YEAR CONTRACT TO SUPPLY TO THE US NAVY - Mark - GREEN =

This is a big contract with a key customer:

Under the first year of the contract, the US Navy has committed to purchase 22 MK88 Gun Mounts and 23 MK48 Electro-Optical Sights, with a total Year 1 contract value of $61.3m. The quantities to be supplied in each subsequent year will be agreed annually, in accordance with the customary structure of this type of US Navy contract.

As others have pointed out, this is just one year’s revenue, and the full 3-year contract value is for $197m. This is around £150m of revenue in Sterling at current FX rates, and is material for a company that has averaged £114m of revenue over the last three years. However, there is a key phrase in the RNS: "continued supply”. This is not a new customer, but these orders are a follow-on from existing ones that will have been delivered in previous years.

So the big question is how does this compare to previous US Navy revenue? MSI doesn't publish a separate figure, so this has to be estimated from what it does disclose:

The Group's largest customer, which is reported in the 'Defence and Security' division, contributed 17.7% to the Group's revenue (2025 - 37.1% from a different customer).

MSI doesn't name it, but the jump lines up with the rise in US revenue and the chairman's comment that the US business did particularly well with continued US Navy success, so it is plausibly NAVSEA.

This means £20.3m is likely to be US Navy sales in FY25, up from £4.4m. This is likely to be an additional £30m revenue per year from this contract versus the FY25 baseline. However, we are halfway through FY27, and the Year 1 run rate is lower than the total contract, so as a rough estimate, it’s an additional £13m of revenue for FY27 and then perhaps the full £30m for FY28 and FY29.

Valuation impact:

It can be hard to estimate the impact of this contract, as MSI only provides group-level Gross Margins, which, at around 34%, include the relatively poor-quality Forgings and Petrol Forecourt businesses.

It is clear from the last few years that EBITDA and EBIT margins are higher on higher revenue:

Forward estimates are not helped by a lack of broker forecasts as a baseline. Still, assuming FY27 was tracking in line with FY26 at this point, Defence & Security revenue is now likely to be around FY25 levels, with similar EBITDA and Net Margins. For FY28 & FY29, revenue would be up to around £101m. Typically, £10-15m shifts in revenue have moved proxy net margins by around 2-3%, so I assume that proxy net margins reach 20% in D&S on this incremental revenue.

This would mean I can estimate the NPV impact of this contract win:

The share price is up around 10% today, adding around £23m to the market cap. My initial thought was that the market had under-reacted to this contract win this morning. However, the market appears to have actually done a remarkably good job of pricing the impact of this in isolation.

Wider context:

I don’t think we can rule out that the market has already priced in significant forward growth in the Defence and Security business. The historical P/E is very high here for a business that has flat revenue and declining EPS over the past three years:

How expected this expansion was, and the path of other defence orders from key customers, is hard to judge, but it's clear that this sort of rating only makes sense if the future is highly likely to be much brighter than the past.

The End Game:

It is widely thought by many holders that the final outcome will be a sale of the business. Michael Bell, who ran the company for over 50 years, stepped down in July. A founder stepping back plus a simplification programme is a common lead-in to a sale. However, Bell has said he intends to stay a substantial shareholder.

It is also worth noting that MSI has said nothing about selling the Defence business. Its stated plan, from the June 2025 strategic review, is the reverse: keep Defence and sell everything else. The Petrol Station Superstructures and Branding sale is still in negotiation. At the AGM on 9 September, the CEO said he still hoped to announce it soon, and Forgings would be dealt with after that. The board has received unsolicited interest in Forgings but hasn't run a formal process.

However, this major contract helps attach a firmer value to the Defence & Security Division, as it gives revenue visibility, and a contracted US Navy backlog means a buyer could pay a defence multiple for it. MSI-Defence Systems US in South Carolina is a sole-source US Navy supplier of the Mk38 Mod4 gun mount and Mk48 sight. A US contractor, or a European group wanting a foothold with the US Navy, might value that highly.

However, there is a risk this ends up much like a Goodwin situation, where enthusiastic long-term shareholders are disappointed with the price achieved, as previously lauded management point to third-party unwillingness to pay up based on one-off factors.

Mark’s view

My initial thought was that a 10% jump in the share price this morning looked a bit low on such a material contract win. However, after running some numbers, the market seems to have reacted remarkably efficiently to the news.

Zooming out, the share price has held up surprisingly well for a company where revenue is flat and EPS down over three years:

This suggests that shareholders were already expecting this sort of contract win, and perhaps many more on top.

It feels to me that in the absence of corporate action (which, as Goodwin has shown, comes with its own risks!), it is tempting to think the easy money has already been made here, given the low Value Rank:

Hence, it may make sense to take a more cautious view. However, the long-term nature of the US Navy supply deal makes the business more attractive to an acquirer, and my fellow commentators have remained very positive about this business for some time. I’m not miserly enough to modify that view on what is clearly a very positive news day for the business GREEN.

Rentguarantor Holdings (LON:RGG)

Up 18% at 113p (£m) - Trading Update - Mark - GREEN =

Shareholders in this company that listed just over a year ago have had quite some ride recently:

In our coverage, Graham turned neutral in April, when Q1 revenue was up 105% year-on-year, which was said to have “materially exceeded Company forecasts”. He went positive in June, when a positive trading update led their broker, Cavendish, to make further material upgrades of around 25% to all future years, and the company was forecast to now break even for FY26. Only the Value Rank of 4 stopped him from going fully GREEN. But then in September, further material upgrades meant that a fully positive view made sense, with him saying:

I don’t think I have much choice but to turn positive on this today:
- It has crossed over into profitability, and is already producing material profits.
- Huge upgrades to its financial forecasts for the next few years.
- All of this growth is well-explained by the introduction of the Renters’ Rights Act.

That last point makes you wonder whether this phenomenal performance is less about management brilliance and more about being in the right place at the right time. However, this reality can’t be underestimated in investing; it really is better to be lucky than good most of the time!

Exposure to these positive trends continues to drive performance, as today they announce yet another material upgrade, driven by strength during the key student letting period in September:

The Board now expects for the Group to deliver revenue in excess of £19 million (previous guidance of in excess of £14 million) and net profit in excess of £9 million for FY2026 (previous guidance of in excess of £4 million) and is also encouraged by the outlook for FY2027.

I’ve rarely seen a company of this size, where net profit forecasts more than double.

Forecast Changes:

Their broker Cavendish say:

We increase revenue by 36% to £19.1m, adjusted EBITDA by 136% to £9.6m, adjusted PBT by 153% to £9.4m. Our forecasts require £6.1m of revenue in 4Q, below the £9.6m generated in 3Q, reflecting the seasonal weighting towards student rental activity. We also allow costs to rise from the current run-rate to support a substantially larger business.

The previous FY28 estimate of 5.9p of EPS is now largely expected to be delivered this year, with 5.6p EPS pencilled in.

Cavendish also upgrades the outer years. However, it is worth noting that they expect EPS to fall in FY27, saying:

Our forecasts assume paid marketing becomes a more important driver of growth and gross margin falls by one percentage point annually from FY27E to allow for potentially higher arrears and defaults as the contract book grows. FY27E EPS falls to 4.8p despite higher PBT because we assume tax losses are fully utilised in FY26E, and a full tax rate applies thereafter.

Investors are not a big fan of falling EPS, even if it is largely the impact of tax losses being exhausted, so this bears watching carefully. Of course, the current trajectory suggests further material upgrades could come for that year.

Valuation:

With fast-moving forecasts and share price, we need to run our own numbers:

If we believe those FY28 numbers, this still looks like good value today, even more so if we assume further upgrades.

With the share price approaching their old price target, it is unsurprising that Cavendish increase their Price Target. However, their methodology looks a little convoluted to me, and I generally don’t like it when you have to make assumptions for 2030 numbers to come up with a valuation argument:

Our target price methodology remains unchanged. We apply a 12x EV/EBIT multiple to FY30E adjusted EBIT, add forecast FY30E net cash and divide by our forecast fully diluted share count. We then discount the resulting value back over four years, compared with five years previously, at 15% pa to reflect execution risk and time to maturity. The updated forecasts and shorter discount period increase our target price from 122p to 165p, implying 73% upside.

Bear points:

Given the phenomenal growth, it is worth pointing out a few things that could go wrong:

1. The growth comes from a single change in the law: Since 1 May, landlords can't take more than one month's rent in advance, so tenants who used to prepay now need a guarantor. That is a one-off shift in demand, not something that keeps compounding.
2. It's too early to know what claims will cost: The company says its claims rate held steady at around 4% of revenue. But most contracts were written in the last four or five months, so few have had time to go wrong. The Act also means that a tenant who stops paying may now stay much longer before they can be removed, so that each claim could be bigger. The customer base is people who can't provide a UK guarantor of their own, such as students, overseas tenants, people on benefits and the self-employed.
3. It's unclear who carries the risk: The model seems to be that underlying risk passes to a panel of insurers; RentGuarantor retains the origination fee. But the company also reports its own claims ratio within its risk policy, which suggests it carries at least some of the risk itself. It raises questions about how much capital it needs to hold and whether it falls under FCA rules. If insurers carry all the risk, those insurers have pricing power and could raise rates or pull out after a bad claims year.
4. Competition could squeeze it: Rivals benefit from the same law. Housing Hand, for example, described growth in applications over the last 100 days as phenomenal. Barriers to entry are low, so prices are likely to come under pressure.
5. Political risk: This government favours tenants, and annual guarantor fees paid by tenants could attract attention, for example under the Tenant Fees Act or new rules in a future rental-sector bill.

Mark’s view

I think the bear points here represent real risks to high long-term growth rates. However, there are no signs of things slowing down in the near-term, indeed quite the opposite. I’m not convinced by broker valuations that require 2030 numbers, but given the phenomenal growth, investors don’t have to look that far out for this to continue to look like good value on forward numbers. As such, it makes sense to keep our positive view. GREEN