SCISYS’s trading update indicates that last year’s problems continue to drift into the distance, as the group returns to its strong project disciplines of the past and indicators continue to point in the right direction. Q1 trading was in line and, supported by a healthy order book, management anticipates a similar good performance in the traditionally stronger H2. Cash flow was particularly robust in Q1, with the group swinging around from a £1m net debt position at end-FY15 to £0.3m net cash at the end of April. Given the confident outlook, in combination with a strong balance sheet, we believe the stock looks attractive on c 10x our FY17e earnings.
SCISYS says it has made an encouraging start to FY16 both in terms of order intake and timely performance on existing contracts across all its three divisions. Further, it says it is well on track to meet full year market expectations. The order book stood at £35.5m at end-April, up 21% over 12 months and just 5% below the record position at the end of December. Of particular note, the Media & Broadcast division has won two new contracts, with one new and one existing client, worth over £3.5m. Encouragingly, this includes the division’s largest order outside its traditional UK/European markets with the South African Broadcast Corporation. Additionally, the Space division has secured over £3.2m of new contracts, mainly from existing programmes, including the European satellite navigation system, Galileo, and the European Space Agency’s rover mission to Mars, ExoMars. The group has an active pipeline of potential acquisitions. Nevertheless, management stresses that any acquisition would need to be a compelling opportunity.
Management is maintaining the guidance, as outlined in the annual report. The goal is to generate organic revenue growth of at least 3% pa over the next five years, and to return the business to generating operating margins of c 8%. We note that management’s performance-related remuneration has more demanding targets.
We have maintained all our forecasts. The stock trades on c 0.55x our FY17e revenues and c 5.9x EBITDA – attractive given seven consecutive years (FY08-14) 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.
