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.
SCISYS is acquiring ANNOVA Systems from its management for an initial €11.35m along with an earnout arrangement for up to an additional €16.48m. Our understanding is that the reason ANNOVA’s management chose to sell was because the company had secured a landmark contract with the BBC and wanted to use this as a springboard for further expansion, but lacked the infrastructure to grow outside its core European markets. ANNOVA’s management will stay with the group for at least the three-year earnout period. ANNOVA’s flagship OpenMedia product complements SCISYS Media & Broadcast division’s dira! OpenMedia has a c 90% share of the German market, where dira! is also strong, and 40% of the French market, where dira! has minimal presence.
We have added ANNOVA into our existing forecasts from year end. This results in a significant boost to revenue and adjusted operating profit while interest and tax also go up. Revenue rises by 17% in FY17 and FY18, adjusted operating profits go up by 39% and 37%, while EPS rise by 27% in each year. However, the group swings into a significant net debt position: we forecast £7.8m as at 31 December 2016, which rises to £13.5m after including the c £5.6m estimated earnout liabilities, which are on a discounted basis.
The stock trades on c 0.87x our FY17e revenue forecast and c 8.2x EBITDA, which is attractive if SCISYS can successfully exploit the M&B division’s strong BBC success story to drive cross-selling opportunities within Europe and extend the product outside Europe. Our DCF model – which is based on our forecasts, a conservative weighted average cost of capital (WACC) of 10% and a 10.7% longterm margin target – values the stock at 142p, or 28% above the current level.