SCISYS reported strong performance in FY18, led by the UK-focused Enterprise Solutions and Defence (ESD) division, which benefited from a reinvigorated sales team. We expect the Space division to lead growth in FY19, following the recent spate of contract wins, while the enlarged Media Solutions division has strong potential for margin recovery. We have upgraded our revenue forecasts but maintained profits as the group needs to invest in its infrastructure to sustain growth. Noting management’s new goal to achieve revenue of £75m and operating profit of £7.0m by end FY22, we believe the stock is attractive on c 13x our FY20e EPS.
Written by
SCISYS Group |
Outlook is ‘very encouraging’ |
Final results |
Software & comp services |
28 March 2019 |
Share price performance
Business description
Next events
Analysts
SCISYS Group is a research client of Edison Investment Research Limited |
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SCISYS reported strong performance in FY18, led by the UK-focused Enterprise Solutions and Defence (ESD) division, which benefited from a reinvigorated sales team. We expect the Space division to lead growth in FY19, following the recent spate of contract wins, while the enlarged Media Solutions division has strong potential for margin recovery. We have upgraded our revenue forecasts but maintained profits as the group needs to invest in its infrastructure to sustain growth. Noting management’s new goal to achieve revenue of £75m and operating profit of £7.0m by end FY22, we believe the stock is attractive on c 13x our FY20e EPS.
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
53.2 |
3.6 |
9.3 |
2.16 |
18.2 |
1.3 |
12/18 |
58.4 |
4.6 |
13.1 |
2.38 |
13.0 |
1.4 |
12/19e |
61.5 |
5.0 |
12.7 |
2.62 |
13.4 |
1.5 |
12/20e |
63.5 |
5.4 |
13.4 |
2.88 |
12.7 |
1.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. IFRS 15 is applied from 1 January 2017.
Final results: Adjusted operating profit jumps 19%
FY18 revenue rose 9.8% to £58.4m whereas adjusted operating profit (before associates) jumped 19% to £5.1m, as the margin increased by 70bp to 8.8%. The numbers were restated for IFRS15, which reduced FY17 revenues by £4.0m and operating profit by £0.2m. ESD led the growth in FY18, after reporting a subdued performance in FY17, increasing revenues by 17% and contribution by 34%. Operating cash flow was strong at £7m before exceptionals and net debt fell by £2.8m to £3.1m. The annual dividend increased by 10% to 2.38p.
Outlook is buoyed by strong order book
The group closed FY18 with a record order book of £98.6m. This was bolstered by c £23m of contract wins since mid-December, of which c £8m were after the period end. Hence, the order book exceeded £100m in January; £41.0m of this was for delivery in the current year, which compared to £32.6m at the same point the prior year. The longer-term balance includes Annova’s contract with the BBC.
Forecast changes: Revenues increased, profits held
We have increased our revenue forecasts by £1.5m in each of FY19 and FY20 to £61.5m and £63.5m respectively and have introduced FY21 estimates. We maintain our other forecasts, including the 25% tax rate, hence this implies a 3% EPS decline in FY19. We now forecast the group to end FY19 with net debt of £0.3m (previously £1.0m), which swings to net cash of £2.6m at end FY20.
Valuation: £100m order book underpins forecasts
The stock trades on 13.4x our maintained earnings in FY19e, falling to 12.7x in FY20 and 12.0x in FY21. Alternatively, the stock trades on 0.84x our FY20 sales and 7.6x EBITDA, which we believe is attractive if SCISYS can maintain the momentum. Our DCF model, which is based on our forecasts and organic CAGR of 3.7% over 10 years, a weighted average cost of capital of 10% and an 11.0% long-term margin target, values the stock at 187p, 10% above the current share price.
Exhibit 1: Financial summary
£'000s |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
45,744 |
53,204 |
58,405 |
61,525 |
63,477 |
65,125 |
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
0 |
||
Gross Profit |
45,744 |
53,204 |
58,405 |
61,525 |
63,477 |
65,125 |
||
EBITDA |
|
|
3,995 |
5,417 |
6,460 |
6,718 |
7,015 |
7,289 |
Adjusted operating profit |
|
|
3,214 |
4,318 |
5,118 |
5,472 |
5,761 |
6,052 |
Amort'n of acq'd intangibles |
0 |
(1,982) |
(1,252) |
(1,200) |
(1,150) |
(1,150) |
||
Exceptionals |
(458) |
2,075 |
(1,337) |
0 |
0 |
0 |
||
Share based payments |
14 |
0 |
(36) |
(50) |
(55) |
(60) |
||
Operating Profit |
2,770 |
4,411 |
2,493 |
4,222 |
4,556 |
4,842 |
||
Net Interest |
(185) |
(710) |
(499) |
(450) |
(400) |
(350) |
||
Associates |
17 |
39 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
3,046 |
3,647 |
4,619 |
5,022 |
5,361 |
5,702 |
Profit Before Tax (FRS 3) |
|
|
2,602 |
3,740 |
1,994 |
3,772 |
4,156 |
4,492 |
Tax |
(380) |
(593) |
(558) |
(1,243) |
(1,327) |
(1,410) |
||
Profit After Tax (norm) |
2,666 |
3,054 |
4,061 |
3,779 |
4,035 |
4,291 |
||
Profit After Tax (FRS 3) |
2,222 |
3,147 |
1,436 |
2,529 |
2,830 |
3,081 |
||
Average Number of Shares Outstanding (m) |
29.0 |
29.1 |
29.5 |
29.7 |
30.0 |
30.3 |
||
EPS - normalised (p) |
|
|
9.2 |
9.3 |
13.1 |
12.7 |
13.4 |
14.1 |
EPS - FRS 3 (p) |
|
|
7.6 |
10.8 |
4.9 |
8.5 |
9.4 |
10.2 |
Dividend per share (p) |
1.96 |
2.16 |
2.38 |
2.62 |
2.88 |
3.17 |
||
Gross Margin (%) |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
||
EBITDA Margin (%) |
8.7 |
10.2 |
11.1 |
10.9 |
11.1 |
11.2 |
||
Operating Margin (%) |
7.0 |
8.1 |
8.8 |
8.9 |
9.1 |
9.3 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
31,955 |
30,465 |
30,119 |
28,904 |
27,769 |
26,685 |
Intangible Assets |
22,441 |
21,086 |
20,056 |
18,856 |
17,706 |
16,556 |
||
Tangible Assets |
9,057 |
9,261 |
9,411 |
9,396 |
9,411 |
9,477 |
||
Deferred tax asset & associates |
457 |
118 |
652 |
652 |
652 |
652 |
||
Current Assets |
|
|
27,895 |
27,580 |
29,710 |
32,233 |
33,309 |
34,385 |
Stocks |
261 |
321 |
1,000 |
1,053 |
1,087 |
1,115 |
||
Debtors |
19,621 |
18,788 |
20,545 |
21,642 |
22,329 |
22,909 |
||
Cash |
6,915 |
8,021 |
8,065 |
9,438 |
9,793 |
10,261 |
||
Current Liabilities |
|
|
(18,763) |
(17,998) |
(23,664) |
(24,306) |
(24,490) |
(24,547) |
Creditors |
(14,959) |
(15,708) |
(18,386) |
(19,278) |
(19,712) |
(20,019) |
||
Short term borrowings |
(3,804) |
(2,290) |
(5,278) |
(5,028) |
(4,778) |
(4,528) |
||
Long Term Liabilities |
|
|
(18,374) |
(14,603) |
(9,631) |
(8,420) |
(6,209) |
(3,998) |
Long term borrowings |
(13,355) |
(11,667) |
(5,886) |
(4,675) |
(2,464) |
(253) |
||
Other long term liabilities |
(5,019) |
(2,936) |
(3,745) |
(3,745) |
(3,745) |
(3,745) |
||
Net Assets |
|
|
22,713 |
25,444 |
26,534 |
28,411 |
30,380 |
32,524 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
3,442 |
10,369 |
5,642 |
6,411 |
6,698 |
6,963 |
Net Interest |
(185) |
(710) |
(499) |
(450) |
(400) |
(350) |
||
Tax |
(1,250) |
147 |
(257) |
(1,171) |
(1,405) |
(1,487) |
||
Capex |
(663) |
(1,255) |
(1,429) |
(1,230) |
(1,270) |
(1,302) |
||
Acquisitions/disposals |
(7,521) |
82 |
0 |
0 |
0 |
0 |
||
Financing |
15 |
(131) |
115 |
0 |
0 |
0 |
||
Dividends |
(671) |
(586) |
(655) |
(725) |
(806) |
(895) |
||
Net Cash Flow |
(6,833) |
7,916 |
2,917 |
2,834 |
2,817 |
2,929 |
||
Opening net debt/(cash) |
|
|
959 |
10,244 |
5,936 |
3,099 |
265 |
(2,551) |
Other including foreign exchange |
(2,452) |
(3,608) |
(80) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
10,244 |
5,936 |
3,099 |
265 |
(2,551) |
(5,480) |
Source: Company data, Edison Investment Research. Note: IFRS15 is applied from FY17.
|
|
Research: TMT
Recurring revenue grew by 48% to represent 44% of H1 sales, reflecting an ongoing shift to SaaS and the acquisition of Elaxy BS&S. However, due to uncertainties over the timing of new contracts and the magnitude of the shift to SaaS, management has reduced its FY19 EBITDA guidance and deferred its long-term projections until later in the year. We have cut our EBITDA forecasts by 25% in FY20 and by 26% FY21. Nevertheless, the digital banking industry dynamics remain attractive and pure-play CREALOGIX has a strong pipeline. In our view, CREALOGIX is uniquely positioned in this industry and is an attractive play on digital banking.