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The Canadian IT services company CGI is acquiring SCISYS for 254.15p in cash. The offer price represents a 24.6% premium to Thursday’s closing price and values the entire issued and to be issued ordinary share capital of SCISYS at c £78.9m. In addition, SCISYS shareholders will receive the final dividend of 1.73p. The offer price translates to c 20x our FY19 earnings forecast, which falls to c 19x in FY20e and 18x in FY21e. Alternatively, the offer values the business at 1.2x FY20e revenues and 11x EBITDA.
Scisys
In an in-line update, SCISYS says it has made a positive start to FY19, with all divisions continuing to expand. Consequently, we are maintaining our forecasts. Management expects FY19 performance to revert to the traditional pattern of a significantly stronger H2 after the more balanced profile in FY18. Noting management’s new goal to achieve revenue of £75m and operating profit of £7.0m by the end of FY22, we believe the stock is attractive on c 14x our FY20e EPS.
SCISYS delivered another good year and slightly beat our FY 2018 revenue and earnings expectations. Adopting IFRS 15, headline revenue rose 10% YoY on a LFL basis but – driven by strong performances in the ESD, Annova and Space businesses – core Professional Services fees actually enjoyed 16% YoY organic growth to deliver a record year. Ignoring IFRS 15, SCISYS would have hit its mid-term sales target of £60m well ahead of plan and now looks to target revenue of £75m. Stripping out £1.3m exceptional costs of re-domiciling to protect Space against Brexit, the Annova earn-out and German restructuring, we see adj. operating margin edged forward to just under 9%, in line with the long-term aspiration of over 9%. Operational gearing translated that into 40% uplift in adj. FD EPS at the bottom line, while the usual healthy cashflow further reduced net debt and underpinned a 10% uplift in dividend. The outlook is for continued strong growth with the order book just short of £100m; notably the re-domiciliation triggered a raft of Space contracts totalling over €20m. We expect a significant element of low-margin 3rd-party revenue in Space this year, so we nudged forward the FY 2019 revenue forecast although earnings are unchanged. We have released FY 2020 forecasts and reiterate our 210p target price.
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.
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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.
After obtaining shareholder approval and subsequent court sanctioning, SCISYS has re-domiciled in the Republic of Ireland. The change will ensure that its German-based space business can continue to work on EU-funded space programmes, such as EGNOS, Galileo and Copernicus. SCISYS decided to finalise the move in Q4 as it is too risky to wait for the final Brexit deal. We have added the expected £0.75m re-domiciliation costs into our model as an exceptional. Hence our forecast year-end net debt rises by £0.75m to £3.7m. As management’s goal of achieving £60m in sales and double-digit margins within the next few years looks increasingly conservative, we believe the stock is attractive on c 12x our FY19e EPS.
SCISYS has reported a strong H1 with professional fees jumping 24%. However, this was off a weak H117 and some business was brought forward from H2. Consequently, we are forecasting a more balanced H1/H2 in FY18. We have increased our FY18 revenues by £3.0m to reflect this balancing, but we have maintained our profit forecasts. All divisions posted record revenues, the order book remains robust at close to £100m and net debt continues to decline. Management’s goal of £60m in revenues and double-digit margins within the next few years looks increasingly conservative and we believe the stock is solid on c 14.6x our FY19e EPS.
SCISYS has released an upbeat AGM trading update, noting that progress has been made across all its four divisions. The order book has reached £100m, up from £91.3m at end-FY17, boosted in particular by the renewal of M&B’s BBC support contract. Cash flow was strong, with net debt declining by £4m over the first five months of the year, in what is typically a subdued period for cash generation. We have increased our FY18 operating cash flow forecast, while conservatively maintaining our other forecasts. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks increasingly conservative, and we believe the stock looks attractive on c 12.6x our FY19e EPS.
SCISYS posted strong FY17 results, with revenues rising by 25%, including c 9% organic growth and c 5% at constant currencies. The Space division stood out, generating 18% growth in both revenue and contribution. Operating profit (excluding associates) rose by 41% to £4.5m, partly benefiting from hedging arrangements, and the operating margin expanded by 90bp to 7.9%. The outlook is encouraging with the order book 41% ahead at a record £91.3m. We have cautiously maintained our profit forecasts, mainly due to the uncertainties relating to Brexit on the Space division, while our FY19 EPS eases on higher tax rate assumptions. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks increasingly conservative, and we believe the stock looks attractive on c 10x our FY19e EPS.
Assisted by the successful ANNOVA acquisition and continued strength in the Space division, SCISYS delivered a very good performance in 2017, beating our sales and cash expectations, and entering this year with continued optimism based on a record order book and falling net debt. We adjust 2018 forecasts for IFRS 15 and nudge our target price forward to 170p.
2017 was a transitional year for SCISYS, with the key Space division flying and ANNOVA’s integration progressing in line with expectations. The attainment of an €18m prime contractor role in H2 is a significant endorsement of SCISYS Space’s proprietary PLENITER software suite, with which SCISYS is targeting the commercial space sector. In August, ANNOVA achieved a key milestone with its BBC contract, which means it is trading ahead of initial management targets. This comes on the back of H1 results, which revealed 6% organic growth across the group and a record half-year order book. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks conservative, and we believe the stock looks attractive on c 11x our maintained FY18e EPS.
A strong set of interims leaves the company comfortably positioned to deliver at the higher end of expectations for FY 2017. Assisted by six months of ANNOVA, acquired in December, H1 revenue grew 22% YoY (and 6% organic) to a record £27.2m. This delivered adj. PBT of £0.9m, down 12% on H1 2016 due to the increased interest from the acquisition loan. We are lifting our revenue expectation from £53.4m to £54.0m. SCISYS profits are traditionally H2-weighted, so we continue to expect it to deliver adj. PBT of £4.0m for 2017 thanks to the exceptional £64m order book and several large new contracts. We reiterate our 155p target price.
In an in line update, SCISYS reports that its order book grew by 4% over Q1, while net debt fell by £2.4m as at end-April. Cash flow was boosted by the receipt of overdue payments from the MOD and a tax credit from HMRC that were deferred from 2016. All business units have been performing well and we note that this year is likely to be more H2 weighted than is typical due to the acquired ANNOVA. Noting management’s goal to achieve £60m in revenues and double-digit operating margins within three to five years, we believe the stock looks attractive on c 9x our maintained FY18e EPS.
It is not often that Iain Dowie is quoted in equity research, but the former Crystal Palace manager gave us a good turn of phrase for the ability to recover swiftly from setback, and that is precisely what SCISYS demonstrated last year. H1 2015 was affected by a problem contract but it was swiftly resolved in H2, and now we see FY 2016 has been a superb year for revenue and profit, even beating our November upgrades. The strong sales growth and margin improvement was entirely organic, spread across all three major divisions, albeit assisted by appreciation of euro earnings from Germany. FY 2016 ended with the debt-funded acquisition of the German newsroom software supplier Annova, which should continue to drive excellent growth and enhanced margins from the high-quality IT services business. There is no change to impressive FY 2017 expectations other than a recalculation of the share dilution that lifts EPS from 10.5p to 11.0p, but we issue FY 2018 forecasts and reiterate our 155p TP.
Both FY16 revenue and adjusted operating profit were 4% ahead of our forecasts, while EPS beat by 8% on a favourable tax charge. The acquisition of ANNOVA Systems, a leading supplier of software-based editorial solutions to the television sector completed at the end of the period. ANNOVA underpins our financial forecasts and complements SCISYS’s dira! product offering for radio broadcasters, creating cross-selling opportunities. Management has reintroduced its goal to achieve £60m in revenues and double-digit operating margins within three to five years. Hence, we believe the stock looks attractive on c 9x our FY18e EPS.
SCISYS is acquiring Germany-based ANNOVA Systems for an estimated deal value of £15.3m. ANNOVA is a leading supplier of software-based editorial solutions to the media sector. It has a track record of generating strong revenue growth and in 2015 won a landmark contract with the BBC, which underpins financial forecasts for 12 years. ANNOVA complements SCISYS’s dira! product offering for radio broadcasters, extends the group’s capabilities into television and creates cross-selling opportunities. The deal significantly boosts earnings, aided by cheap debt financing costs, and is value enhancing on our assumptions. Consequently, we believe the stock continues to look attractive on c 10x our FY17e earnings.
Management says that due to continued strong trading in H2, FY16 revenues and adjusted operating profits are anticipated to be ahead of current market guidance. The group has been benefiting from contract wins while a weakening sterling against the euro has additionally benefited its Space and Media & Broadcast units. Consequently, we have upgraded our forecasts, which comes on top of the significant upgrades we made after the interims in September. Given the potential for margin recovery and the improving growth profile, in combination with a strong balance sheet, we believe the stock looks attractive on c 11x our FY17e earnings.
SCISYS reported a strong H1, with revenues up 35% to a record £22.2m and the group returned comfortably to profit, despite being held back by currency hedging due to the slide in the pound against the euro. The performance partly reflects the impact of a problem project in H115, which led to deferrals. The group has also been winning new business and had a strong closing order book at £35m. Cash flow was very strong, with the group returning to a net cash position of £1.4m from £1.0m net debt at end-December. We have upgraded our adjusted operating profit forecasts by 12% in FY16 and 8% in FY17. Given the potential for margin recovery and the improving growth profile, in combination with a strong balance sheet, we believe the stock looks attractive on c 12x our FY17e earnings.
SCISYS says it has maintained the encouraging start to the year, as reported at the AGM in June. Strong cash generation has continued, with net cash rising from £0.3m at end-April to £1.4m at end-June. Around half of group revenues are in euros, and if the euro-sterling exchange rate remains around current levels throughout FY16, SCISYS has indicated that current FY16 consensus forecasts will be significantly exceeded even after allowing for hedging impacts. We will review our forecasts following the interims in September, when we will have more information. Given the scope for upgrades, in combination with a strong balance sheet, we believe the stock looks attractive on c 12x our FY17e earnings.
SCISYS’s trading update indicates that last year’s problems continue to drift into the distance, as the group returns to its strong project disciplines of the past and indicators continue to point in the right direction. Q1 trading was in line and, supported by a healthy order book, management anticipates a similar good performance in the traditionally stronger H2. Cash flow was particularly robust in Q1, with the group swinging around from a £1m net debt position at end-FY15 to £0.3m net cash at the end of April. Given the confident outlook, in combination with a strong balance sheet, we believe the stock looks attractive on c 10x our FY17e earnings.
Following a very positive post year-end trading update in January, SCISYS prelims confirmed a strong recovery in H2 after H1 was impacted by a problem contract, which was rapidly and fully resolved. The net debt is steadily being reduced and the company has reinstated the dividend in full, making up for the missed interim payment. It was a better-than-expected set of results thanks to a strong H2 performance, backed by some significant contract wins. FY 2015 revenue fell 11% in absolute terms (but only 4% at constant currency) to £36.1m, beating our forecast by £0.2m. This was assisted by £0.9m from a full year of Xibis, acquired in December 2014. In H2, sales rose 2% YoY and SCISYS swung back to adj. PBT of £1.8m from a £1.2m loss in H1. Adj. PBT for the FY of £0.6m was double our £0.3m forecast. An expected heavy effective tax burden was lower and adj. EPS was 1.2p – positive against an expected loss. SCISYS’ usual strong cash conversion delivered £1.6m of cash from operations, reduced to £0.2m FCF by tax, interest and £0.6m (tangible) capex. There was also a £0.8m deferred cash payment for Xibis and £0.3m of dividends, reducing LY’s £0.3m net cash position to net debt of £1.0m; however, this is a considerable improvement on the £1.9m net debt reported at interims. The final dividend of 1.78p is up 11% YoY, offering a yield of 2.8%. 2016 has started well, with an opening order book up 23% to £37.2m; our forecasts for FY 2016 are unchanged and we issue FY 2017 forecasts. We lift our target price from 76p to 81p
FY15 results reveal that the difficult H1 is firmly behind it, as SCISYS bounced back with a strong H2. In H1, SCISYS was hit by difficulties in a major fixed-price development project, but this was fully resolved in October. The group has a healthy order book of £37.2m, c 23% ahead of a year earlier, of which £25.8m is scheduled for delivery in FY16. Hence 69% of FY16 revenues are already in the bag and the group has a healthy pipeline of new business. SCISYS has a medium-term goal to return the business to 8%+ operating margins, which leaves the shares looking attractive trading on c 9x our FY17e earnings (based on a 6.6% margin).
SCISYS has released an underlying positive trading update, which shows the difficult H1 is now firmly behind it. H2 trading was encouraging and FY16 guidance has been maintained, supported by a strong order book and healthy pipeline. Cash generation was stronger than we expected with the group ending the year with £1.0m net debt (we forecasted £1.4m). SCISYS has a long-term goal to generate revenues of £60m+ and doubledigit margins, although we noted in September that the target for this has slipped back from FY18. Nevertheless, this objective keeps the shares looking attractive trading on c 10x our FY17e earnings.
SCISYS has been awarded a significant £4m four-year contract to develop, support and host a business/regulatory application for the UK Ministry of Defence (MoD). The new contract indicates that momentum is returning to the business in the wake of the contract hiccup earlier this year, which has since been rectified. The contract will boost the year-end order book and underpins our forecasts for FY16 and beyond. SCISYS has a long-term goal to generate revenues of £60m+ and double-digit margins, although we noted in September that the target for this has slipped back from FY18. Nevertheless, this objective keeps the shares looking attractive trading on c 10x our FY17e earnings.
SCISYS rode out a ‘perfect storm’ in H1 and foresees calmer waters and a sunnier outlook for H2, confident in making our FY earnings forecasts. H1 suffered from a combination of a problematic fixed-price contract in the ESD division; the on-going relative strength of Sterling against the Euro; and deferrals of expected projects in all divisions. Even the newly acquired Xibis mobile business experienced challenges, delivering a fractional loss from revenue below plan, with the Xibis founders leaving and foregoing their earn-out rights. Against that backdrop, the Interim results are a testament to the underlying strength and durability of the high-quality IT projects business with a number of significant wins from the blue-chip client base offering a bright outlook for H2. H1 saw net debt rise to £1.9m, but when banking covenants were tested in August, SCISYS relied on the strength of its contracted revenue base, good banking relationships and its asset-rich balance sheet. Relaxed covenant limits now provide sufficient headroom to deliver the expected trading performance. Prudently, the dividend has been suspended, pending greater visibility on the full-year cash flow. On the back of the Interims we eased back our FY sales forecast to £35.9m (from £38.0m) but maintained EBITDA expectations of £1.3m and we reiterate our 76p target price based on 12x FY 2016 earnings expectations, as we look to the calmer waters ahead in H2.
While the H115 numbers are marked by an untypical problem project, the underlying picture is looking brighter at SCISYS. The group has been winning some good business, such as a renewed framework contract with the BBC, and it has a healthy pipeline of opportunities, while some modest strengthening of the euro also helps. The long-term goal to generate revenues of £60m+ and double-digit margins remains in place, though the target has clearly slipped back from FY18. Nevertheless, this objective keeps the shares looking attractive trading on c 10x our FY17e earnings.
In June, SCISYS revealed that it had been hit by cost overruns at a fixedprice development project. Also, as a result of the weak euro and the subsequent consensus forecast cuts, SCISYS said it might be in breach of its UK banking covenants. Following negotiations with the group’s UK banks, the covenant issue has now been favourably resolved. This is partly due to the group’s strong balance sheet, which includes the freehold property on its Chippenham HQ. Consequently, this leaves the shares looking attractive to investors, with the stock trading below book value.
SCISYS has revealed that it has been hit by cost overruns at a fixed-price development project. We note this is the group’s first significant problem project since FY07, as it has been managing its projects more effectively since then, having put more rigorous procedures in place. Trading across the rest of group has been broadly in line with expectations. However, SCISYS has also been affected by the recent strength in sterling against the euro. We have cut our forecasts, and SCISYS says it might be in breach of its UK banking covenants. Nevertheless, the business remains profitable at the pre-tax level, has banking facilities in place and a balance sheet supported by sizeable property assets.
Following a detailed and aggressive review, the senior management team has decided to take a major provision against a fixed-price contract in the ESD division that appears to have been substantially underestimated. This provision, together with the forex impact of continuing sterling strength, is likely to virtually eliminate the expected profit this year. We therefore reduce our FY 2015 forecast adj. PBT from £3.3m to £0.3m. There is likely to be a spill over into FY 2016 as staff are reallocated to complete the contract – set for delivery in February – and we reduce next year’s PBT forecast from £3.8m to £2.4m. Cash balances will be low and the company risks breaching banking covenants; however, the banks remain supportive and SCISYS is underpinned by a strong balance sheet with £7m NBV of property, including a £5m Chippenham HQ. We anticipate the dividend will be unchanged. Overall, this is disappointing but it is a ring-fenced, one-off issue, and procedures have been amended to ensure no recurrence.
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