There is a decent chance of a return to those highs and beyond if the latest trading news is anything to go by. The forthcoming results for the six months to end March 2016 are scheduled for release on Wednesday, 8 June 2016 and will highlight an 11 per cent increase in revenues to around £10m and a near 10 per cent rise in operating profit to £1.5m over the same period in 2015. Sales order intake of £6m is 20 per cent higher year-on-year and includes £2m of contract wins from new customers, more than that achieved during the whole of the previous financial year and up from £1.5m when I updated the investment case a couple of months ago. The closing order book of £3.2m at the end of March is almost 13 per cent ahead on 12 months earlier, so there is clear sales momentum coming through.
Moreover, over half of revenues are recurring (pre-contracted for at least 12 months), so there is a high level of repeat business which gives investors confidence in the company’s ability to lift full-year revenues by £1.2m to £20.4m as analysts at analysts at research firm GECR predict. On this basis, expect pre-tax profits to rise by about 9 per cent to £3.46m in the 12 months to end September 2016, generating a double digit rise in EPS to 5.6p and supporting a near 10 per cent hike in the dividend per share to 2.3p. That payout is supported by strong cash generation as the company ended the half year with net funds of £3.4m, worth 6p a share, even after paying out more than £1.5m of deferred consideration on previous acquisitions, around £657,000 on the final dividend of 1.2p a share paid in mid-March, and further planned investment in management, sales and delivery capacity for its fast growing digital retail software business.
It’s worth making the investment given that a number of prospective new customer opportunities are expected to come to fruition in the busier second half of the financial year. In particular, One iota, a provider of mobile applications for retailers, and specifically a cloud-based technology that integrates existing back-office systems to optimise a retailer's applications, is a key driver of top-line growth and profits. One iota's product offering includes smart software that implements iPad-based solutions to help shop sales assistants maximise in-store sales and assist shoppers in buying out-of-stock products or those available in the retailer's other stores. The rapid growth of One iota explains why the contribution from digital sales, e-commerce and catalogue markets in Sanderson's higher-margin retail division continues to grow strongly. This side of the business accounted for almost four fifths of Sanderson's operating profit and two-thirds of its revenue last financial year.
Sales momentum across the board
Another key take for me in last week’s trading update is that the company's enterprise software businesses have been converting a number of previously delayed projects into firm orders. There has been particularly “high level of sales orders” from the food and drink, logistics and wholesale cash and carry sectors. In fact, the manufacturing software segment has gained almost £1m of new business in the past six months, driven by the contribution from the food and drink processing sector. The point being that the positive trading outlook from this part of the company contrasts markedly with what was a subdued performance a year ago. In other words all parts of the business are now firing, and generating sales. That’s important because a greater proportion of incremental sales drops straight down to profits and cashflow given that the high recurring revenue base already covers the majority of fixed overheads.
The bottom line is that once you strip out net funds from Sanderson’s market value of £43.9m, its enterprise value of £40.5m equates to only 11 times cash profit estimates of for this year, a marked discount to the software and IT services sector average multiple of 14.6 times. That’s a modest rating for a company offering exposure to a high growth digital retail technology business that's earning eye-catching profit margins and is successfully exploiting opportunities in both m-commerce and e-commerce.
Or put it another way, strip out net cash of 6p a share, and Sanderson’s shares only trade on 13 times underlying EPS estimates of 5.6p for the 12 months to end September 2016, falling to 11.8 times EPS estimates of 6.25p the year after, according to equity research firm GECR. That represents a sizeable discount to small-cap software companies operating in the same universe. For instance, both Tracsis (TRCS:504p) and Craneware (CRW:795p), are rated on 20 and 22 times cash-adjusted earnings estimates (July 2017 and June 2017 period ends, respectively).
Needless to say I maintain my conservative looking 90p target price ahead of the forthcoming results. Buy.
