SCISYS — Update 17 November 2016

SCISYS — Update 17 November 2016

SCISYS

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SCISYS

Outperformance continues

Trading update

Software & comp services

17 November 2016

Price

98p

Market cap

£28m

Net cash (£m) at end H116

1.4

Shares in issue

29.0m

Free float

63%

Code

SSY

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.0

11.4

40.5

Rel (local)

9.9

13.6

29.2

52-week high/low

99p

66p

Business description

SCISYS provides a range of professional services in support of the planning, development and use of computer systems in the space, media/broadcast and defence sectors, as well as to other public and private sector enterprises.

Next events

Trading update

January 2017

Final results

March 2017

Analysts

Richard Jeans

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

SCISYS is a research client of Edison Investment Research Limited

Management says that due to continued strong trading in H2, FY16 revenues and adjusted operating profits are anticipated to be ahead of current market guidance. The group has been benefiting from contract wins while a weakening sterling against the euro has additionally benefited its Space and Media & Broadcast units. Consequently, we have upgraded our forecasts, which comes on top of the significant upgrades we made after the interims in September. Given the potential for margin recovery and the improving growth profile, in combination with a strong balance sheet, we believe the stock looks attractive on c 11x our FY17e earnings.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

40.4

3.2

8.2

1.61

11.9

1.6

12/15

36.1

0.6

1.3

1.78

74.1

1.8

12/16e

44.0

2.9

8.5

1.90

11.6

1.9

12/17e

45.5

3.1

8.6

2.10

11.4

2.1

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Trading update: Continued strong H2 trading

Management says the improved trading is “a result of additional contract wins, improved efficiency in delivering existing projects and the continuing positive impact of the exchange rate fluctuations in sterling against the euro.” The UK-based Enterprise Solutions & Defence (ESD) division has been more entrepreneurial in winning pass-through revenues (projects delivered by third parties), taking advantage of its prime contractor position on government preferred supplier frameworks to win new business, which is on a higher margin than traditional pass-through revenue. Space has some notable new wins, while M&B has been benefiting from two wins in H1. Sterling fell from c €1.31 prior to the Brexit vote to c €1.21 immediately afterwards and now stands at c €1.16. This benefits Space (some costs are sterling but revenues are in euros) and M&B (most revenues and costs are in euros, albeit the BBC contract has revenues in sterling and some costs in euros). We note that the group partially hedges its euro-denominated cash flows.

Forecasts: Another round of upgrades

We have upgraded our revenue forecasts by 6% in FY16, FY17 and FY18, with gains spread equally across the three main divisions. Our adjusted operating profit forecasts rise by 11% in FY16 and by 6% in FY17 and FY18, and our EPS forecasts rise at a similar rate. We now forecast the group to end FY16 with net cash of £1.9m (previously £1.7m), which rises to £3.8m a year later.

Valuation: Attractive given the scope for upgrades

The stock trades on c 0.58x our FY17e revenue forecast and c 6.4x EBITDA, which is attractive given the forecast improving margins and the group’s strong cash flow discipline. Further, SCISYS retains a strong balance sheet that includes the freehold on the group’s HQ, which was sold in 2007 for £9m and repurchased in 2011 for £5m. Our DCF model, which is based on our forecasts and a conservative weighted average cost of capital (WACC) of 11% and an 8.5% long-term margin target, values the stock at 123p, or 26% above the current level.

Forecast changes

We have upgraded our revenue forecasts by 4% in FY16 and 6% in FY17 and FY18, with gains spread across the three main divisions. Our adjusted operating profit forecasts rise by 11% in FY16 and by 6% in FY17 and FY18 and our EPS forecasts rise at a similar rate. Additionally, we have eased our depreciation forecasts to £0.75m, £0.82m and £0.84m for FY16-18 from £0.83m, £0.88m and £0.90m previously. We now forecast the group to end FY16 with net cash of £1.9m (previously £1.7m), which rises to £3.8m a year later.

Exhibit 1: Forecast changes

Revenues (£m)

Adjusted operating profit (£m)

EPS (p)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

41.5

44.0

6

2.8

3.1

11

7.6

8.5

12

2017e

43.0

45.5

6

3.1

3.3

6

8.1

8.6

6

2018e

44.4

46.9

6

3.4

3.6

6

8.6

9.1

6

Source: Edison Investment Research

Exhibit 2: Financial summary

£'000s

2013

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

42,598

40,359

36,106

44,000

45,500

46,940

Cost of Sales

0

0

0

0

0

0

Gross Profit

42,598

40,359

36,106

44,000

45,500

46,940

EBITDA

 

 

4,179

4,156

1,548

3,852

4,119

4,454

Adjusted operating profit

 

 

3,221

3,361

818

3,100

3,300

3,609

Amort'n of acq'd intangibles

(283)

0

0

0

0

0

Exceptionals

(1,191)

(135)

0

0

0

0

Share based payments

(35)

(42)

(11)

(40)

(40)

(40)

Operating Profit

1,712

3,184

807

3,060

3,260

3,569

Net Interest

(217)

(177)

(196)

(210)

(190)

(170)

Associates

0

0

3

20

25

30

Profit Before Tax (norm)

 

 

3,004

3,184

625

2,910

3,135

3,469

Profit Before Tax (FRS 3)

 

 

1,495

3,007

614

2,870

3,095

3,429

Tax

(153)

(766)

(241)

(427)

(553)

(680)

Profit After Tax (norm)

2,701

2,394

384

2,482

2,582

2,789

Profit After Tax (FRS 3)

1,342

2,241

373

2,442

2,542

2,749

Average Number of Shares Outstanding (m)

29.0

29.0

29.0

29.3

29.9

30.5

EPS - normalised (p)

 

 

9.3

8.2

1.3

8.5

8.6

9.1

EPS - FRS 3 (p)

 

 

4.6

7.7

1.3

8.3

8.5

9.0

Dividend per share (p)

1.46

1.61

1.78

1.90

2.10

2.30

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

9.8

10.3

4.3

8.8

9.1

9.5

Operating Margin (%)

7.6

8.3

2.3

7.0

7.3

7.7

BALANCE SHEET

Fixed Assets

 

 

16,164

17,155

16,553

16,681

16,772

16,866

Intangible Assets

7,006

8,233

7,831

7,831

7,831

7,831

Tangible Assets

9,137

8,899

8,635

8,763

8,854

8,948

Deferred tax asset & associates

21

23

87

87

87

87

Current Assets

 

 

19,270

18,886

17,839

21,732

23,595

25,561

Stocks

344

325

211

257

266

274

Debtors

13,829

12,334

12,299

13,712

14,190

14,650

Cash

3,969

5,798

4,352

6,786

8,162

9,659

Current Liabilities

 

 

(12,261)

(10,561)

(12,003)

(14,588)

(14,642)

(14,668)

Creditors

(9,508)

(9,686)

(8,699)

(11,534)

(11,838)

(12,114)

Short term borrowings

(2,753)

(875)

(3,304)

(3,054)

(2,804)

(2,554)

Long Term Liabilities

 

 

(4,090)

(5,023)

(2,333)

(2,122)

(1,911)

(1,700)

Long term borrowings

(3,888)

(4,595)

(2,007)

(1,796)

(1,585)

(1,374)

Other long term liabilities

(202)

(428)

(326)

(326)

(326)

(326)

Net Assets

 

 

19,083

20,457

20,056

21,703

23,814

26,059

CASH FLOW

Operating Cash Flow

 

 

(1,379)

4,774

1,570

4,996

3,892

4,219

Net Interest

(217)

(177)

(196)

(210)

(190)

(170)

Tax

(1,325)

100

(583)

(341)

(378)

(502)

Capex

(666)

(618)

(619)

(880)

(910)

(939)

Acquisitions/disposals

0

(358)

(889)

0

0

0

Financing

(16)

(61)

(14)

0

0

0

Dividends

(381)

(435)

(340)

(670)

(577)

(650)

Net Cash Flow

(3,984)

3,225

(1,071)

2,895

1,837

1,958

Opening net debt/(cash)

 

 

(1,241)

2,672

(328)

959

(1,936)

(3,773)

HP finance leases initiated

0

0

0

0

0

0

Other

71

(225)

(216)

0

0

0

Closing net debt/(cash)

 

 

2,672

(328)

959

(1,936)

(3,773)

(5,731)

Source: SCISYS accounts (historicals), Edison Investment Research (forecasts)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SCISYS and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SCISYS and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: TMT

Expert System — Update 17 November 2016

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