“We are in a really good place and have a high level of confidence for 2018 and beyond", says Klaus Heidrich, chief executive of Aim-traded Scisys (SSY:190p) after the supplier of bespoke software systems to the media, space, defence and commercial sectors more than doubled first-half operating profit to £2.5m. House broker finnCap tweaked its estimates up again and now expects full-year pre-tax profits to rise by more than a fifth to £4.6m on revenues of £57m to produce adjusted EPS of 12.1p.
Finance director Chris Cheetham also points out that the current order book of £97m is expected to get a boost in the coming weeks and months when a “strong pipeline of prospects is converted”, adding further substance to expectations that Scisys can deliver £700,000 higher pre-tax profits of £5.3m in 2019 and raise EPS to 14p. He has reason to be confident as the company’s space division is absolutely flying, having secured a key €3.9m (£3.8m) contract with Airbus, the prime contractor to the European Space Agency (ESA) and the European GNSS Agency, for developing EGNOS V3, Europe's regional satellite-based augmentation system, which improves the performance of global navigation satellite systems, such as GPS and Galileo.
The space division also secured contract extensions for existing work for the EU-funded Galileo programme, and is delivering on a €18m programme of work on Germany's flagship Heinrich Hertz satellite mission, the majority of revenue from which will be booked between 2018 and 2021. Brexit is not an issue as Scisys already has a contingency plan in place to enable the business to continue work on EU-funded projects after March 2019.
The company’s enterprise and defence arm is performing robustly too, buoyed by contracts with multinationals like Vodafone (for developing a dashboard and reporting tool for the 111 non-emergency number). The unit has just landed a £2m contract with Transport for London’s Future Bus Systems programme to provide software design and development for timetabling and scheduling.
I can also reveal that Munich-based Annova Systems, a supplier of software-based editorial solutions to major European newsrooms including the BBC, is likely to contribute in the order of €1.4m of annual cash profit for the full year, warranting the €14m total consideration paid a couple of years ago. The final £700,000 earn-out is due shortly after which Scisys will integrate its media and broadcast (M&B) unit with Annova to generate more cross-selling opportunities and revenue synergies. Scisys’ M&B unit offers an array of functions for radio broadcasters including automatically recording feeds, researching sounds, writing scripts, editing an item or planning programmes. German media group MDR, French commercial broadcaster RTL and the BBC have all signed contracts with both divisions. Mr Heidrich says that their combined profit performance is tracking higher than last year’s outcome.
Cash generation stood out in the first-half results: net borrowings have fallen sharply from £9m to £3.3m in the past 12 months. That’s good news for a continuation of the dividend policy, which has seen the payout hiked by at least 10 per cent a year since 2013.
Trading on a modest forecast PE ratio of 13.5 for 2019, and offering a prospective dividend yield of 1.4 per cent, I continue to see further upside potential as contract momentum builds. So, having first advised buying Scisys’ shares at 102p ('Tune into a media play', 11 Oct 2017), and last reiterated that advice at 155p ('Scisys on the upgrade', 2 Jul 2018), the shares continue to rate a buy.
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