SCISYS reported strong performance in FY18, led by the UK-focused Enterprise Solutions and Defence (ESD) division, which benefited from a reinvigorated sales team. We expect the Space division to lead growth in FY19, following the recent spate of contract wins, while the enlarged Media Solutions division has strong potential for margin recovery. We have upgraded our revenue forecasts but maintained profits as the group needs to invest in its infrastructure to sustain growth. Noting management’s new goal to achieve revenue of £75m and operating profit of £7.0m by end FY22, we believe the stock is attractive on c 13x our FY20e EPS.
FY18 revenue rose 9.8% to £58.4m whereas adjusted operating profit (before associates) jumped 19% to £5.1m, as the margin increased by 70bp to 8.8%. The numbers were restated for IFRS15, which reduced FY17 revenues by £4.0m and operating profit by £0.2m. ESD led the growth in FY18, after reporting a subdued performance in FY17, increasing revenues by 17% and contribution by 34%. Operating cash flow was strong at £7m before exceptionals and net debt fell by £2.8m to £3.1m. The annual dividend increased by 10% to 2.38p.
The group closed FY18 with a record order book of £98.6m. This was bolstered by c £23m of contract wins since mid-December, of which c £8m were after the period end. Hence, the order book exceeded £100m in January; £41.0m of this was for delivery in the current year, which compared to £32.6m at the same point the prior year. The longer-term balance includes Annova’s contract with the BBC.
We have increased our revenue forecasts by £1.5m in each of FY19 and FY20 to £61.5m and £63.5m respectively and have introduced FY21 estimates. We maintain our other forecasts, including the 25% tax rate, hence this implies a 3% EPS decline in FY19. We now forecast the group to end FY19 with net debt of £0.3m (previously £1.0m), which swings to net cash of £2.6m at end FY20.
The stock trades on 13.4x our maintained earnings in FY19e, falling to 12.7x in FY20 and 12.0x in FY21. Alternatively, the stock trades on 0.84x our FY20 sales and 7.6x 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 3.7% over 10 years, a weighted average cost of capital of 10% and an 11.0% longterm margin target, values the stock at 187p, 10% above the current share price.