2017 was a transitional year for SCISYS, with the key Space division flying and ANNOVA’s integration progressing in line with expectations. The attainment of an €18m prime contractor role in H2 is a significant endorsement of SCISYS Space’s proprietary PLENITER software suite, with which SCISYS is targeting the commercial space sector. In August, ANNOVA achieved a key milestone with its BBC contract, which means it is trading ahead of initial management targets. This comes on the back of H1 results, which revealed 6% organic growth across the group and a record half-year order book. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks conservative, and we believe the stock looks attractive on c 11x our maintained FY18e EPS.
SCISYS says that its “trading results will comfortably meet current market guidance, both in respect of revenues and adjusted operating profit.” The order book is at record levels, and cash flow was “particularly healthy”, with year-end net cash £0.6m better than we forecasted at £5.9m.
In October, SCISYS was awarded an €18m contract by OHB System AG to deliver the ground station control and communications infrastructure for the German national satellite communications mission, Heinrich Hertz, as prime contractor. The project will commence in 2017 and the majority of project revenues will be delivered between 2018 and the scheduled completion date in 2021.
In August, SCISYS’s ANNOVA unit achieved an important commercial milestone in its BBC contract, for the supply of ANNOVA's OpenMedia software. Given that the critical software functionality implementation and live pilot milestones have been successfully completed, the roll-out of OpenMedia across the BBC has begun.
The recent contract news comfortably underpins our forecasts. Given the risks from Brexit on Galileo revenues, we are conservatively maintaining our profit forecasts. The stock trades on c 0.85x our FY18e sales and c 7.9x EBITDA, which we believe is attractive if SCISYS can maintain 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 160p (previously 149p), 23% above the current level.