SCISYS posted strong FY17 results, with revenues rising by 25%, including c 9% organic growth and c 5% at constant currencies. The Space division stood out, generating 18% growth in both revenue and contribution. Operating profit (excluding associates) rose by 41% to £4.5m, partly benefiting from hedging arrangements, and the operating margin expanded by 90bp to 7.9%. The outlook is encouraging with the order book 41% ahead at a record £91.3m. We have cautiously maintained our profit forecasts, mainly due to the uncertainties relating to Brexit on the Space division, while our FY19 EPS eases on higher tax rate assumptions. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks increasingly conservative, and we believe the stock looks attractive on c 10x our FY19e EPS.
Group revenues rose by 25% to £57.2m, including c 9% organic growth and a full year contribution from ANNOVA. Professional fees lifted by 28% to £48.0m, representing 84% of total group revenues, while the adjusted operating profit, excluding associates, jumped by 41% to £4.5m. Operating cash flow surged to £10.4m, bolstered by one-off factors, while free cash flow (FCF) was £8.6m (providing an FCF yield of 23%) and net debt reduced by £4.3m to £5.9m.
We adjusted our forecast for the impact of IFRS 15. If applied in FY17 IFRS 15 would have reduced both revenues and costs by c £5.5m, not altering profits, but boosting margins by 84bp. Including IFRS 15, our FY18 revenue forecast comes back by £2.8m to £53.0m while FY19 falls by £0.7m to £57m. Our PBT forecasts are maintained while our EPS forecasts edge up in FY18 for a lower share count assumption and ease in FY19 on a lower tax rate forecast. We are no longer forecasting any earnout payments on the ANNOVA acquisition, and now forecast the group to end FY18 with net debt of £3.3m which declines to £0.6m a year later.
The stock trades on c 11x our revenues in FY18, falling to 10x in FY19 and to 9x in FY20. Alternatively, the stock trades on c 0.84x our FY19e sales and c 7.2x 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% over 10 years, a weighted average cost of capital of 10% and a 11.5% long-term margin target – values the stock at 159p (previously 160p), 20% above the current level.