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 says its “order book has remained strong, well ahead of the equivalent position in June 2015, and is underpinned by a sizeable pipeline of prospective new business opportunities”. As in previous years, the group’s full year trading performance is expected to show a bias towards the second half. Strong cash generation has enabled the group to turn its £1.0m net debt position at the start of the year to £1.4m net cash at end-June.
The group’s Germany-based businesses (Space and Media & Broadcast) and the UK Space business generate revenues in euros. UK Space has costs in sterling and hence gains a double impact from a rise in the euro against sterling. However, SCISYS mitigates its exchange rate exposure through a hedging programme. Following Brexit, the pound fell sharply against the euro from c 1.31 to c 1.20 at end-June. This resulted in an adverse revaluation at 30 June and will create a £0.5m charge in H116. The pound has continued to decline to c 1.15 euros.
SCISYS does not expect any adverse consequences as a result of the EU referendum. We note that the UK Space business generates the bulk of its revenue from the European Space Agency, which awards business in proportion to funding from countries and the UK participation is not expected to be affected by Brexit.
The stock trades on c 0.61x our maintained FY17e revenue forecast and c 6.6x EBITDA – attractive given the forecast improving margins and the group’s strong cash flow discipline. Further, SCISYS 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.