Both FY16 revenue and adjusted operating profit were 4% ahead of our forecasts, while EPS beat by 8% on a favourable tax charge. The acquisition of ANNOVA Systems, a leading supplier of software-based editorial solutions to the television sector completed at the end of the period. ANNOVA underpins our financial forecasts and complements SCISYS’s dira! product offering for radio broadcasters, creating cross-selling opportunities. Management has reintroduced its goal to achieve £60m in revenues and double-digit operating margins within three to five years. Hence, we believe the stock looks attractive on c 9x our FY18e EPS.
FY16 revenue rose by 27% (17% constant currency) to £45.7m (we forecast £44.0m), while adjusted operating profit quadrupled to £3.2m, despite a £0.3m hit from an FX hedge. There was a £3.4m working capital outflow, reflecting the lumpy movements around the year-end, including a tax rebate coming in late and the impact from a troubled contractor payment system at the UK Ministry of Defence. Hence, net debt was £2.4m higher than we forecast at £10.2m. This was after the completion of the ANNOVA deal on the last day of the year for an initial £10.5m (ie £9.7m cash paid plus c £3m debt and £2.2m cash acquired), which was slightly above our forecasts. While the opening order book (excluding ANNOVA) was slightly down on the prior period at £34m, the value invoiceable within one year was practically unchanged. £31m of FY17 revenue is already contracted and the pipeline remains healthy. Two significant contract wins have since been announced for the Space division (c €3.9m ExoMars and c €1.9m Mission Control contracts).
We have maintained our FY17 and FY18 revenue and adjusted operating profit forecasts. However, EPS rise by 2% in each year due to lower assumed shares in issue. For FY17 we forecast that working capital will swing back by £1.7m and that tax payments are minimal due to receipt of tax rebates and further R&D tax credits. Hence, year end net debt remains as we previously forecasted at £6.2m for both FY17 and FY18. We forecast 10% dividend growth in each of the next three years.
The stock trades on c 0.84x our FY18e revenue forecast and c 7.8x 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 a conservative weighted average cost of capital (WACC) of 10% and a 10.7% long-term margin target – values the stock at 145p (previously 142p), 32% above the current level.