SCISYS reported a strong H1, with revenues up 35% to a record £22.2m and the group returned comfortably to profit, despite being held back by currency hedging due to the slide in the pound against the euro. The performance partly reflects the impact of a problem project in H115, which led to deferrals. The group has also been winning new business and had a strong closing order book at £35m. Cash flow was very strong, with the group returning to a net cash position of £1.4m from £1.0m net debt at end-December. We have upgraded our adjusted operating profit forecasts by 12% in FY16 and 8% in FY17. Given the potential for margin recovery and the improving growth profile, in combination with a strong balance sheet, we believe the stock looks attractive on c 12x our FY17e earnings.
H1 revenues rose 35% to a record £22.2m and adjusted operating profit swung around by £2.2m to a £1.1m profit, despite being held back by £0.5m due to currency hedging. The Enterprise Solutions & Defence (ESD) division’s revenues rose by 79% to £8.6m, partly reflecting the poor H115 along with the impact from deferred business. Space lifted by 22%, helped by £3.2m of new contracts, mainly from existing programmes and Media & Broadcast improved by 12%. Utilisation rates remain high and the group is recruiting across all of its divisions. SCISYS has resumed dividend payments, having passed the dividend in the prior period.
We have upgraded our revenue forecasts by 9% in FY16 and 8% in FY17 and FY18. Our adjusted operating profit forecasts rise by 12% in FY16, 8% in FY17 and 14% in FY18. We have also reduced the tax charge and hence EPS rises by 22% in FY16, 15% in FY17 and 19% in FY18. We now forecast the group to end FY16 with net cash of £1.7m (previously £0.3m).
The stock trades on c 0.61x our FY17e revenue forecast and c 6.6x EBITDA, which is 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. Our DCF model, which is based on our forecasts and a conservative weighted average cost of capital (WACC) of 11% and an 8.5% long-term margin target, values the stock at 117p, or 23% above the current level.