On the money

It certainly hasn’t taken Scisys (SSY:115p), a supplier of bespoke software systems to the media, broadcast, space, defence and commercial sectors long to deliver positive news. I interviewed the senior management team at length a fortnight ago and was so impressed by the company’s prospects that I recommended buying the shares at 102p, placing a 155p target price on the equity (‘Tune into a media play’, 11 Oct 2017).

At the time finance director Chris Cheetham informed me that the company’s bid pipeline was “better than any we have seen before”, optimism that looks warranted when you consider that Scisys’s space division, which delivers mission management and control software, won a €5.6m (£5m) contract for two European Space Agency (ESA) programmes, and the directors were “confident of extending our footprint in the Galileo satellite navigation programme”.

They were also upbeat about winning other contracts, too. That confidence has proved well placed after the company was appointed prime contractor yesterday on a €18m contract to deliver the ground station control and communications infrastructure for the German national satellite-communications mission, Heinrich Hertz. The project starts later this year and the majority of revenue will be delivered between 2018 and completion in 2021. The contract not only helps underpin next year’s forecasts – analyst Lorne Daniel at housebroker finnCap expects Scisys to deliver 2018 revenue of £55.2m and boost both pre-tax profit and EPS by 10 per cent to £4.4m and 11.2p, respectively – but it’s a clear validation of Scisys’s Pleniter® software suite for the planning, implementation, control and operation of complete satellite missions. A key advantage of Pleniter® is that it offers scope to provide reliable automation technology that complements conventional, non-automated system elements.

Given the magnitude of the contract award, it’s hardly surprising that investors reacted positively, chasing the shares up intra-day to last November’s 11-year high of 118p. As I flagged up a fortnight ago when I initiated coverage, a close above the 118p key resistance level would signal a major chart break-out, and one that is now clearly on the cards both from a technical and fundamental perspective. Indeed, the shares are still modestly rated on 10.5 times earnings estimates for 2018, and are hardly overpriced on 1.6 times net asset value per share. A prospective dividend yield of 1.9 per cent, rising to 2.1 per cent in 2018, is decent enough, too. I still feel that finnCap’s 155p target price, which values the equity at 14 times 2018 earnings estimates and places an enterprise valuation of £52m on the company after factoring in net debt of £7m at the end of 2017, is a sensible valuation and one equating to 8.5 times likely cash profit of £6m in 2018.

So, offering 35 per cent upside to my target price of 155p, and with further contract wins in the offing to further derisk 2018 earnings expectations, I continue to rate the investment case in a positive light. On a bid-offer spread of 114p to 115p, Scisys's shares are worth buying. Please note that 72 per cent of the shares in issue are held by the top 12 shareholders, so this limits liquidity and can acerbate price moves, but it’s still possible to deal in bargain sizes of 10,000 shares. Buy.

Boot’ful timing

If Scisys’s share price gain came in double quick time, then that of residential land developer and construction company Henry Boot (BOOT:335p) was lightening fast. I flagged up the potential on Monday last week when I rated the shares a buy at 305p (‘A trio of small-cap plays’, 16 Oct 2016). At the time they were trading on 12 times full-year earnings forecasts, priced on a 22 per cent discount to finnCap’s 398p a share sum-of-the-parts valuation and underpinned by a 2.6 per cent prospective dividend yield. I also noted that activity levels across all business segments and, in particular, within property development and land promotion, were highly supportive of analysts’ current year profit expectations.

I can now report that following an accelerated completion of transactions in September and October, and the successful delivery of major development schemes through the second half of the year, the company’s performance will be materially ahead of those profit expectations. Analyst Guy Hewitt at broker finnCap raised his full-year revenue expectations from £373m to £395m yesterday to support a 15 per cent upgrade in pre-tax profit to £51.6m, an outcome that resulted in EPS estimates being lifted by 16 per cent to 28.5p, suggesting 34 per cent year-on-year growth.

I understand that Henry Boot’s strategic land division, Hallam Land, has now concluded disposals on 14 schemes in the year to date including the final phases of sites at Biddenham, Bedfordshire, for 233 residential units and Marston Moretaine, a town located between Bedford and Milton Keynes, for 183 residential units. In addition, the company has already exchanged contracts on four schemes for completion in 2018. Hallam Land’s year-to-date sales of 2,048 residential units are 50 per cent higher than the total for the whole of last year, a performance that explains why finnCap now expects operating profit from land promotion to account for 40 per cent of the total this year.

Moreover, the directors also revealed that residential units have been flying off the shelves, quite literally at the Chocolate Factory at York with all the flats now sold. The company had originally budgeted for sales taking place between mid-2016 and mid-2019, so it has materially beaten this target. It has done this too within its property development business, having concluded several deals earlier than originally anticipated, including the sale of the final 30,500 sq ft industrial unit at Thorne, South Yorkshire; the sale of an 8,150 sq ft retail park in Monmouth, the historic county town of Monmouthshire, Wales; and 80 residential units on land in Prestonpans, a small fishing town situated to the east of Edinburgh. The delivery of several industrial units located just off junction 29A of the M1 at Markham Vale has also been quicker than forecast.

The news gets better because Henry Boot continues to backfill its opportunity pipeline and work on deals for 2018, thereby replacing those executed earlier than expected this year. In fact, the directors note that “there is a possibility that some of these may conclude before the current financial year end”. So, with the earnings risk still skewed to the upside, and the shares trading on a discount to finnCap’s sum-of-the-parts valuation of 398p, I continue to rate them a buy on 11.7 times current year upgraded earnings estimates and underpinned by a 2.4 per cent prospective dividend yield, based on a 14 per cent hike in this year’s payout per share to 8p. Buy.

Cenkos upgrades

Henry Boot isn’t the only company on my watchlist that has seen analysts hiked their earnings expectations. The same is true of corporate broker Cenkos Securities (CNKS:105p) which reported a 156 per cent rise in first-half pre-tax profit to £4.2m driven by a 91 per cent increase in revenue to £29.2m. I commented on the half-year results three weeks ago (‘Engineering gains’, 2 Oct 2017), after which analysts Andrew Mitchell and Martyn King at Edison Investment Research increased their full-year EPS estimates by 11 per cent to 12.4p, up from 4.7p in 2016, based on pre-tax profit rising by 90 per cent to £8.4m on revenue up a third to £58m.

With cash on the balance sheet worth 35p a share, and net trading positions worth a further 30.5p a share, analysts at Edison believe that shareholders can expect a hefty rise in the full-year payout from 6p in 2016 to 11p a share, implying a hike in the final payout from 5p to 6.5p a share. The half-year dividend shot up by 350 per cent to 4.5p a share and has gone ex-dividend since my last article was published.

Interestingly, Edison outlined in its analyst note full details of all the placing and IPO transactions the company has been involved in this year, noting that it raised £523m capital for clients in the third quarter, having raised £702m in the first half, underlining management’s earlier comments [at the time of the results] that it has made a good start to the second half and has an encouraging pipeline of transactions, too.

I included Cenkos’s shares in my 2017 Bargain Shares Portfolio at 88.4p ('Bargain shares: second chance', 17 Aug 2017) and after including dividends of 9.5p a share banked the holding is up 27 per cent, albeit the share price has come back on profit-taking since the half-year results. However, rated on a modest eight times earnings estimates, and with the forecast final dividend of 6.5p a share equating to over 6 per cent of the current share price alone, and cash and trading positions equating to 60 per cent of the share price, in my book the profit taking has gone too far. Buy.

A slight downgrade

Of course, investing is never a one-way street, as Redditch-based Solid State (SOLI:435p), a supplier and design-led manufacturer of specialist industrial and rugged computers, battery power packs to the electronics market, microwave systems and advanced antenna products, highlighted yesterday. The shares were marked down almost 10 per cent after analyst David Buxton at finnCap clipped his pre-tax profit estimate by £300,000 to £3.1m for the financial year to the end of March 2018, implying a flat outcome year on year. The company actually delivered a robust revenue performance in the first half, much as I had anticipated when I advised running profits on the shares at 530p ('High-yielding opportunities', 8 Aug 2017), having first advised buying over the summer at 410p (‘A trio of small-cap buys’, 10 Jul 2017).

As expected, the company’s distribution business continues to deliver robust growth, so much so that revenue surged by 20 per cent in the first half and helped lift Solid State’s overall revenue by 12 per cent to £22.5m. Manufacturing revenues did well, too, up 7 per cent, in the six-month period. However, a change of sales mix and a longer lead time to deliver some of its complex antenna programmes has meant that the company’s communications business unit has performed below management’s expectations. The flip-side is that the pipeline remains strong which should position this unit for a much stronger outcome in the 2018-19 financial year.

Nonetheless, Solid State’s gross margins declined three percentage points to 28 per cent in the six-month period, which is why analysts reined in their full-year profit expectations. There are positives, though, not least of which is that the investment in driving organic sales is starting to reap benefits, the full effect of which should be seen in the 2018-19 financial year. Also, I understand that the open order book ended the first half at around £18m, over 20 per cent higher than 12 months earlier, suggesting that expectations of the company delivering revenues of between £43.4m and £45m for the 12 months period to the end of March 2018, up from £40m in the 2017 financial year, are well founded. It also suggests that forecasts of the company delivering a 10 per cent hike in pre-tax profit in the 2018-19 financial year are realistic, and that’s without taking into consideration the possibility of corporate activity as there is scope for the cash-generative company to utilise its cash-rich balance sheet and make an earnings-accretive acquisition, a possibility I discussed with the directors before I initiated coverage in July.

The bottom line is that Solid State’s shares, which are still up on my recommended buy-in level of 410p, are currently rated on 14 times earnings estimates, and offer a 2.8 per cent historic dividend yield. Although investors may take time to regain their composure, I feel that there is upside to my earlier 480p target price, and perhaps beyond if corporate activity drives an upgrade, so would hold on.

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com for £14.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: Secrets to successful stock picking