Aim-traded shares in Scisys (SSY:155p), a supplier of bespoke software systems to the media, broadcast, space, defence and commercial sectors, smashed through my 170p target price to hit a 12-year high of 184p at the end of May before profit-taking took hold.
I now feel that a return to the May highs, and beyond, is a real possibility given that the board has just issued a bullish trading update that led analysts to tweak their 2018 pre-tax profits and EPS estimates up to £4.5m and 12p, respectively, based on annual revenues of £53m. The earnings forecasts imply mid-teens year-on-year growth, and are underpinned by a record order book that has surged by 10 per cent to more than £100m since the start of the year. Recent orders include a €3.9m (£3.4m) award from Airbus for work on EGNOS, Europe's regional satellite-based augmentation system that improves the performance of global navigation satellite systems, such as GPS and Galileo. Scisys's space division in Germany will supply command and control technology, as well as maintenance and support facilities.
Reassuringly, the company has not experienced resistance from awarding authorities on EU space programmes where it has been bidding, and is not directly engaged in security-sensitive Public Regulatory Service activities on the Galileo programme where future involvement of UK companies has been threatened. Space is not the only division doing well as Scisys’s media broadcast business has secured an enhanced service contract for the BBC until at least 2025 and has added six new German broadcasters to its customer base.
Finances are improving, too, with net borrowings cut to only £1.9m at the end of May, a £4m improvement since the start of the year. As I pointed out in my initiation note last October, as borrowings are paid down more of the ownership of the company shifts from debt holders to equity shareholders, one reason why I highlighted Scisys as one of 26 case studies in my new book, Successful Stock Picking Strategies. Debt reduction also underpins the progressive dividend policy as more cash flow can be recycled back to shareholders rather than funding interest and capital payments. The board certainly has form, having raised the payout by at least 10 per cent a year since 2013. Expect the same again this year to boost the payout per share to 2.4p. The raft of contract wins and the falling interest bill also add weight to expectations that Scisys can lift EPS to 14p in 2019.
True, the shares have done well since I initiated coverage at 102p (‘Tune into a media play’, 11 Oct 2017), having maintained my positive stance at 132p when I covered the full-year results (‘On a profitable earnings beat’, 3 Apr 2018), and latterly at 155p (‘From yachts to clean energy’, 23 Apr 2018). But there is still value on offer as the forward PE ratio of 13 drops to only 11 in 2019, less than half the rating of much larger specialist IT software companies. That deep discount is unwarranted and is likely to narrow if Scisys continues to deliver operationally, as seems highly likely. In the circumstances, I am raising my target price to 200p and rate the shares a buy.
■ Simon Thompson's new book Successful Stock Picking Strategies can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. Full details of the content is available on YPDBooks website.
Simon's second book Stock Picking for Profit has been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. Simon has published an article outlining the content: 'Secrets to successful stock picking'
