SCISYS has released a confident trading update and we are maintaining our forecasts. Cash flow was healthy, with net debt of £3.1m slightly better than the £3.7m we expected. The order book (c £100m at end-FY18) has been bolstered by c £23m of contract wins since mid-December, of which c £8m were after the period end. The move to redomicile to an EU country before the final Brexit deal is already paying off, as c £18m of this business was only winnable if the group parent company was based in an EU country, due to Brexit. With Space and ESD showing solid organic growth, and the full benefits from the M&B/Annova merger yet to flow, we believe the stock is attractive on c 14x our FY19e EPS.
Written by
SCISYS Group |
£23m of new business since mid-December |
Trading update |
Software & comp services |
28 January 2019 |
Share price performance
Business description
Next events
Analysts
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SCISYS has released a confident trading update and we are maintaining our forecasts. Cash flow was healthy, with net debt of £3.1m slightly better than the £3.7m we expected. The order book (c £100m at end-FY18) has been bolstered by c £23m of contract wins since mid-December, of which c £8m were after the period end. The move to redomicile to an EU country before the final Brexit deal is already paying off, as c £18m of this business was only winnable if the group parent company was based in an EU country, due to Brexit. With Space and ESD showing solid organic growth, and the full benefits from the M&B/Annova merger yet to flow, we believe the stock is attractive on c 14x our FY19e EPS.
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
57.2 |
3.8 |
10.0 |
2.16 |
18.0 |
1.2 |
12/18e |
56.0 |
4.4 |
12.0 |
2.38 |
15.0 |
1.3 |
12/19e |
60.1 |
5.0 |
12.7 |
2.62 |
14.2 |
1.5 |
12/20e |
61.9 |
5.4 |
13.4 |
2.88 |
13.4 |
1.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. IFRS 15 is applied from 1 January 201.
Trading update: Comfortably meets current guidance
The company says it ‘expects to comfortably meet current market guidance in respect of revenues and adjusted operating profit’. The order book was ‘in the region of £100m’ (roughly where it was mid-way through 2018) compared with £91.3m at end-FY17. Year-end net debt reduced to £3.1m despite c £0.75m Brexit contingency costs and a c £0.7m payment of a final earnout settlement for Annova. Both the Space and Enterprise Solutions & Defence (ESD) divisions saw a significant expansion in headcount to meet demand. Annova was re-named SCISYS Media Solutions in December and a formal merger is planned with SCISYS’s Media & Broadcast in 2019, ahead of schedule. The main benefit of the merger will be a unified management team, enabling a co-ordinated approach to account management and sales. Significant cost synergies are not anticipated.
Six contract wins since mid-December
SCISYS has announced six new contract wins since mid-December, totalling £22.7m. Five were in the Space division, totalling £20.3m, and one, valued at £2.4m, in ESD. Overall £17.9m of the Space deals relate to Galileo and Egnos, which were only awarded to SCISYS because it is now domiciled in an EU country. Meanwhile, the ESD deal provides reassurance that the defence sector is happy to continue to award business to SCISYS despite its redomicile outside of the UK.
Valuation: £100m order book underpins forecasts
The stock trades on 15.0x our maintained earnings in FY18e, falling to 14.2x in FY19 and to 13.4x in FY20. Alternatively, the stock trades on 0.88x our FY19 sales and 7.9x 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 3.5% over 10 years, a weighted average cost of capital of 10% and an 11.0% long-term margin target, values the stock at 186p, slightly above the current share price.
£17.9m contracts on EU-funded space programmes since mid-December
SCISYS has announced six new contract wins since mid-December totalling £22.7m. Three of these, valued at c £7.9m, were after the period end, indicating that the order book was comfortably above £100m in early January. Five of the contracts were in the Space division, totalling £20.3m, and one, valued at £2.4m, in Enterprise Solutions & Defence. The bulk of the contracts will be delivered in FY19 and FY20, although the ESA-ESOC deal extends to 2023 and EGNOS V3 to 2025.
To satisfy EU rules for EU-funded space programmes, not only do service providers need to operate within the EU but their parent companies also have to be based in an EU country. Consequently, the SCISYS parent company redomiciled in Ireland in November 2018. As a result, SCISYS management believes it has mitigated Brexit risks affecting the group. In the table below, all the Space deals excluding the ESA-ESOC contract relate to Galileo and Egnos, which are EU-funded programmes. The four deals are worth £17.9m in aggregate and these deals would not have been awarded to SCISYS had SCISYS remained domiciled in the UK, even though Brexit has not yet been formalised. The bulk of this EU-funded work relates to the next stage of work done in previous stage projects. SCISYS also won additional work, including the Galileo ground segment work and taking over a component of the Mission Key Management Facility in the Thales Alenia Space France contract from another sub-contractor.
Exhibit 1: Recent contract wins
Contract win |
Announced |
Space |
Total |
Details |
€m |
£m |
|||
Thales Alenia Space France |
17/12/2018 |
11.2 |
9.8 |
SCISYS Deutschland has been awarded a contract with Thales Alenia Space France for the continuation and further enhancement of four Galileo Ground Mission Segment (GMS) elements. |
Defence sector |
20/12/2018 |
N/A |
2.4 |
SCISYS UK has been awarded follow-on-work, continuing a defence project started in 2016 which SCISYS delivered successfully to schedule. |
Galileo ground segment work |
24/12/2018 |
3 |
2.6 |
SCISYS Deutschland has received two initial orders with Thales Alenia Space France for the development and implementation of security-relevant elements within the Galileo Ground Segment. |
Galileo contract |
03/01/2019 |
5 |
4.4 |
SCISYS Deutschland has been awarded a contract with GMV in Spain for the continuation and further enhancement of three elements in the Galileo Ground Control Segment (GCS). |
ESA-ESOC ground station |
10/01/2019 |
2.8 |
2.4 |
SCISYS Deutschland has been awarded a contract with ESA-ESOC for Monitoring & Control (M&C) system tailoring services for the ESA Tracking Network (ESTRACK). |
EGNOS V3 |
16/01/2019 |
1.32 |
1.1 |
Contract with AIRBUS Defence and Space for development, integration, verification and maintenance of the EGNOS V3 Performance Assessment Facility (PAF). |
Totals |
23.3 |
22.7 |
Source: Company announcements
Management board appointment
In December, SCISYS appointed Natasha Laird as legal director. Ms Laird has been general counsel since 2014 and company secretary since September 2016. She was instrumental in the process of redomiciling the parent company in Ireland last year. SCISYS now has four full time executive directors – Klaus Heidrich, CEO, Chris Cheetham, FD, Steve Brignall, technical director and Natasha Laird, legal director.
Exhibit 2: Financial summary
£'000s |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
36,106 |
45,744 |
57,164 |
56,012 |
60,125 |
61,940 |
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
0 |
||
Gross Profit |
36,106 |
45,744 |
57,164 |
56,012 |
60,125 |
61,940 |
||
EBITDA |
|
|
1,548 |
3,995 |
5,619 |
6,160 |
6,689 |
6,984 |
Adjusted operating profit |
|
|
818 |
3,214 |
4,520 |
4,983 |
5,472 |
5,761 |
Amort'n of acq'd intangibles |
0 |
0 |
(1,982) |
(1,250) |
(1,200) |
(1,150) |
||
Exceptionals |
0 |
(458) |
2,075 |
(750) |
0 |
0 |
||
Share based payments |
(11) |
14 |
0 |
(45) |
(50) |
(55) |
||
Operating Profit |
807 |
2,770 |
4,613 |
2,938 |
4,222 |
4,556 |
||
Net Interest |
(196) |
(185) |
(710) |
(567) |
(450) |
(400) |
||
Associates |
3 |
17 |
39 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
625 |
3,046 |
3,849 |
4,416 |
5,022 |
5,361 |
Profit Before Tax (FRS 3) |
|
|
614 |
2,602 |
3,942 |
2,371 |
3,772 |
4,156 |
Tax |
(241) |
(380) |
(593) |
(874) |
(1,243) |
(1,340) |
||
Profit After Tax (norm) |
384 |
2,666 |
3,256 |
3,542 |
3,779 |
4,021 |
||
Profit After Tax (FRS 3) |
373 |
2,222 |
3,349 |
1,497 |
2,529 |
2,816 |
||
Average Number of Shares Outstanding (m) |
29.0 |
29.0 |
29.2 |
29.4 |
29.7 |
30.0 |
||
EPS - normalised (p) |
|
|
1.3 |
9.2 |
10.0 |
12.0 |
12.7 |
13.4 |
EPS - FRS 3 (p) |
|
|
1.3 |
7.6 |
11.5 |
5.1 |
8.5 |
9.4 |
Dividend per share (p) |
1.78 |
1.96 |
2.16 |
2.38 |
2.62 |
2.88 |
||
Gross Margin (%) |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
||
EBITDA Margin (%) |
4.3 |
8.7 |
9.8 |
11.0 |
11.1 |
11.3 |
||
Operating Margin (%) |
2.3 |
7.0 |
7.9 |
8.9 |
9.1 |
9.3 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
16,553 |
31,955 |
30,465 |
29,159 |
27,944 |
26,809 |
Intangible Assets |
7,831 |
22,441 |
21,086 |
19,836 |
18,636 |
17,486 |
||
Tangible Assets |
8,635 |
9,057 |
9,261 |
9,205 |
9,190 |
9,205 |
||
Deferred tax asset & associates |
87 |
457 |
118 |
118 |
118 |
118 |
||
Current Assets |
|
|
17,839 |
27,895 |
33,333 |
31,862 |
34,916 |
36,067 |
Stocks |
211 |
261 |
321 |
315 |
338 |
348 |
||
Debtors |
12,299 |
19,621 |
24,541 |
24,045 |
25,810 |
26,588 |
||
Cash |
4,352 |
6,915 |
8,021 |
7,052 |
8,318 |
8,681 |
||
Current Liabilities |
|
|
(12,003) |
(18,763) |
(23,481) |
(23,393) |
(24,655) |
(24,894) |
Creditors |
(8,699) |
(14,959) |
(21,191) |
(21,353) |
(22,865) |
(23,354) |
||
Short term borrowings |
(3,304) |
(3,804) |
(2,290) |
(2,040) |
(1,790) |
(1,540) |
||
Long Term Liabilities |
|
|
(2,333) |
(18,374) |
(14,603) |
(11,690) |
(10,479) |
(8,268) |
Long term borrowings |
(2,007) |
(13,355) |
(11,667) |
(8,754) |
(7,543) |
(5,332) |
||
Other long term liabilities |
(326) |
(5,019) |
(2,936) |
(2,936) |
(2,936) |
(2,936) |
||
Net Assets |
|
|
20,056 |
22,713 |
25,714 |
25,938 |
27,726 |
29,714 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
1,570 |
3,442 |
10,369 |
6,081 |
6,388 |
6,674 |
Net Interest |
(196) |
(185) |
(710) |
(567) |
(450) |
(400) |
||
Tax |
(583) |
(1,250) |
147 |
(930) |
(1,283) |
(1,405) |
||
Capex |
(619) |
(663) |
(1,255) |
(1,120) |
(1,202) |
(1,239) |
||
Acquisitions/disposals |
(889) |
(7,521) |
82 |
(617) |
0 |
0 |
||
Financing |
(14) |
15 |
(131) |
0 |
0 |
0 |
||
Dividends |
(340) |
(671) |
(586) |
(652) |
(725) |
(806) |
||
Net Cash Flow |
(1,071) |
(6,833) |
7,916 |
2,194 |
2,728 |
2,824 |
||
Opening net debt/(cash) |
|
|
(328) |
959 |
10,244 |
5,936 |
3,742 |
1,015 |
Other including foreign exchange |
(216) |
(2,452) |
(3,608) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
959 |
10,244 |
5,936 |
3,742 |
1,015 |
(1,809) |
Source: Company data, Edison Investment Research
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Increased trading strength in the late Christmas period marks Findel out as one of the winners in a very mixed retail landscape. The combination of a serious and wide-ranging value offer, with responsible consumer credit support, appeals to the substantial consumer cohort that is managing household finances. The company is clear of terrestrial retail issues, while online ordering has hit a new high of 78% this Christmas. We upgrade our underlying IFRS9 adjusted earnings forecasts, and our updated valuation of 348p now shows 74% headroom above the share price.