In an in line update, SCISYS reports that its order book grew by 4% over Q1, while net debt fell by £2.4m as at end-April. Cash flow was boosted by the receipt of overdue payments from the MOD and a tax credit from HMRC that were deferred from 2016. All business units have been performing well and we note that this year is likely to be more H2 weighted than is typical due to the acquired ANNOVA. Noting management’s goal to achieve £60m in revenues and double-digit operating margins within three to five years, we believe the stock looks attractive on c 9x our maintained FY18e EPS.
SCISYS says that FY17 “revenues and profits are comfortably on track to meet current guidance.” The order book has grown from £64.6m as at end December to £67.1m at end-March. £37.8m is deliverable after FY17 – this predominantly relates to the long-term BBC contract of ANNOVA, which was acquired at the end of FY16. In February, the Space division won €5.6m of contracts to deliver mission management and control software for two European space programmes. SCISYS is confident that it will be able to extend its footprint in the Galileo satellite navigation programme in spite of media speculation over the impact of Brexit. Media & Broadcast has won a new £1.1m contract for BBC Wales and signed up its first French customer, RTL, which is an existing customer of ANNOVA. In April, the ESD division secured a place on the Metropolitan Police Solution Provider Framework, giving it access to contracts worth c £30m pa over four years. We note that framework contracts are not included in the group’s order book.
ANNOVA, which supplies software-based editorial solutions to the television, radio and online markets is “progressing steadily”. A key milestone for the BBC contract is due later this year, which will reflect the completion of the pilot stage of the project and also will determine the size of an earnout payment. After this milestone is met, the revenue model will switch to recurring support and maintenance, although there will be a ramp up as the solution is rolled out across the BBC. Since its acquisition, ANNOVA has added a significant new commercial broadcaster in the UK, together with new customers in the Czech Republic, Austria and Canada.
The stock trades on c 0.81x our FY18e revenues and c 7.4x EBITDA, which is attractive if SCISYS can continue the momentum. Our DCF model – which is based on a weighted average cost of capital of 10% and a 10.7% long-term margin target – values the stock at 149p (previously 145p), 39% above the current level.