While the H115 numbers are marked by an untypical problem project, the underlying picture is looking brighter at SCISYS. The group has been winning some good business, such as a renewed framework contract with the BBC, and it has a healthy pipeline of opportunities, while some modest strengthening of the euro also helps. The long-term goal to generate revenues of £60m+ and double-digit margins remains in place, though the target has clearly slipped back from FY18. Nevertheless, this objective keeps the shares looking attractive trading on c 10x our FY17e earnings.
H1 results reflect the impact of cost overruns at a major fixed-price development project in the group’s Enterprise Solutions and Defence (ESD) division, disclosed in the June trading update, along with the impact of the weak euro (the average rate slipped 12% to 1.38€/£). These factors, along with the consequence that increased resources required to complete the problem project impair the group’s ability to capitalise on other revenue-generating opportunities, led to us cutting our FY15e adjusted operating profit forecast by £3.0m following the June trading update. The group swung to a £1.1m operating loss in H1 as revenue dipped 22% to £16.5m. Professional fees, which are the predominant component of revenue, fell by a similar 22% to £13.1m. While management says its markets remain tough, with sales cycles lengthening, it also says the pipeline is “particularly encouraging”, and has maintained its profit guidance. Nevertheless, the interim dividend has been skipped, given the poor H1 numbers, but we note that the results commentary suggests the final dividend may well be topped up, depending on the full-year numbers and outlook, hence we are currently maintaining our dividend forecasts. Historically, the company has maintained very healthy dividend cover.
We have conservatively eased back our revenue forecasts by £2m in FY15 and £1m in FY16, paring back across all the divisions. Costs are also pulled back and we have maintained our operating profit forecasts. We have broadly maintained our cash flow forecasts, and still forecast the group to end FY15 with £1.4m net debt.
The stock trades on 0.6x our FY16e revenues and 6.2x 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.