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.
The group’s Enterprise Solutions & Defence (ESD) division has been awarded a significant contract by the UK MoD to deliver software and services to support the Defence Supply Chain Operations and Movements. The contract has a value of £4m over the next four years, and therefore represents c 3% of annual revenues over the period. The contract indicates that opportunities remain in the public sector despite the public sector cutbacks, in this case driven by regulatory and compliance requirements. While coming under the defence area, this is not a defence-type contract, but instead involves the design and delivery of a business/regulatory application (Customs Compliance Management Information System or CCMIS) and the provision of ongoing hosting and support services. The CCMIS will enable the department to be tax efficient and compliant with HMRC regulations and EU law. We note that equipment and supplies leaving the UK are required to be treated as exports and If they are returned to the country they must then be treated as imports. It will also help the MoD meet the requirements of international defence trade agreements, including the US ITAR (International Traffic in Arms Regulations) and DTCT (Defence Trade Co-operation Treaty) arrangements.
We are maintaining our forecasts and will review them again following the trading update in late January.
The stock trades on 0.6x our FY16e revenues and 6.7x 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.