SCISYS has released a confident trading update and we are maintaining our forecasts. Cash flow was healthy, with net debt of £3.1m slightly better than the £3.7m we expected. The order book (c £100m at end-FY18) has been bolstered by c £23m of contract wins since mid-December, of which c £8m were after the period end. The move to redomicile to an EU country before the final Brexit deal is already paying off, as c £18m of this business was only winnable if the group parent company was based in an EU country, due to Brexit. With Space and ESD showing solid organic growth, and the full benefits from the M&B/Annova merger yet to flow, we believe the stock is attractive on c 14x our FY19e EPS.
The company says it ‘expects to comfortably meet current market guidance in respect of revenues and adjusted operating profit’. The order book was ‘in the region of £100m’ (roughly where it was mid-way through 2018) compared with £91.3m at end-FY17. Year-end net debt reduced to £3.1m despite c £0.75m Brexit contingency costs and a c £0.7m payment of a final earnout settlement for Annova. Both the Space and Enterprise Solutions & Defence (ESD) divisions saw a significant expansion in headcount to meet demand. Annova was re-named SCISYS Media Solutions in December and a formal merger is planned with SCISYS’s Media & Broadcast in 2019, ahead of schedule. The main benefit of the merger will be a unified management team, enabling a co-ordinated approach to account management and sales. Significant cost synergies are not anticipated.
SCISYS has announced six new contract wins since mid-December, totalling £22.7m. Five were in the Space division, totalling £20.3m, and one, valued at £2.4m, in ESD. Overall £17.9m of the Space deals relate to Galileo and Egnos, which were only awarded to SCISYS because it is now domiciled in an EU country. Meanwhile, the ESD deal provides reassurance that the defence sector is happy to continue to award business to SCISYS despite its redomicile outside of the UK.
The stock trades on 15.0x our maintained earnings in FY18e, falling to 14.2x in FY19 and to 13.4x in FY20. Alternatively, the stock trades on 0.88x our FY19 sales and 7.9x EBITDA, which we believe is attractive if SCISYS can maintain the momentum. Our DCF model, which is based on our forecasts and organic CAGR of 3.5% over 10 years, a weighted average cost of capital of 10% and an 11.0% longterm margin target, values the stock at 186p, slightly above the current share price.