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 says that its H2 performance was encouraging and expects underlying FY15 results will “comfortably meet current market guidance”. Additionally, FY16 guidance has been maintained and hence we have held our forecasts. The opening order book has been boosted by a high level of activity in Q4, including two particularly large contracts. In H1, SCISYS revealed the group’s first significant problem project since FY07. This related to cost overruns on a fixed-price development project and was completely resolved by October. Consequently, SCISYS has further tightened its project risk assessment procedures.
The two significant contracts signed In Q4 were a £4m four-year contract to develop, support and host a business/regulatory application for the UK Ministry of Defence and a further contract from Thales Alenia Space France for the system extension and software enhancement in the Galileo Ground Mission Segment. The latter contract is carried out under a programme of the European Union, funded by the EU, and is worth c €5.2m over two years.
We have reduced our end of FY15 net debt forecast by £0.4m to £1.0m on reduced working capital levels, while the end of FY16 position switches by the same amount to £0.1m net cash. All our other forecasts are maintained.
The stock trades on 0.6x our FY16e revenues and 6.3x EBITDA – attractive given the long-term trend of margin improvements and a strong cash flow discipline. The group retains a strong balance sheet that includes the freehold on the group’s HQ, which was sold in 2007 for £9m and repurchased in 2011 for £5m.