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.
The company says it has made an “impressive start” to 2018, with growth being achieved both through winning new customers and expanding business in established ones. FY18 is expected to be more evenly balanced than FY17.
There is an early termination of the ring-fencing of ANNOVA, which relates to the acquisition earnout, at a cost of €0.7m. Clearly the vendors saw more value in a swift integration of ANNOVA with SCISYS M&B to take full advantage of synergies.
The company stands to lose significant revenues from its work on Galileo and EGNOS if Brexit proceeds without specific amendments. If this happens, we expect SCICYS to redomicile in an EU country at a cost in the region of c £0.5m.
We have added the €0.7m final payment for the acquisition of ANNOVA and increased FY18 operating cash flow by £0.9m, and hence we now forecast the group to end FY18 with net debt of £3.0m (previously £3.3m).
The stock trades on c 13.3x our earnings in FY18e, falling to c 12.6x in FY19e. Alternatively, the stock trades on c 0.89x our FY19e sales and c 7.7x 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% over 10 years, a weighted average cost of capital of 10% and an 11.5% long-term margin target – values the stock at 178p, 11% above the current level. This is 12% above our previous level, reflecting adjustment to the base and increased cash flow.