It’s not often that a company doubles half-year operating profits, reiterates guidance for the full year and its chief executive boasts that the business is “in a really good place” only to find that a month later the share price has been marked down by 25 per cent. However, the indiscriminate selling we have seen across the market in the past month has meant that good companies as well as bad have been marked down. In the case of Scisys (SSY:145p), a supplier of bespoke software systems to the media, space, defence and commercial sectors, this is an outstanding repeat buying opportunity.
For starters, following last month’s financial results, analysts at house broker finnCap tweaked their estimates up yet again and expects Scisys to deliver 2018 pre-tax profits a fifth higher at £4.6m on revenues of £57m to produce adjusted EPS of 12.1p. On this basis, the shares are rated on only 12 times likely earnings for the full year, a rating that completely ignores the important point that the £97m order book will be boosted by a “strong pipeline of prospects [to be converted in the coming weeks and months]”, according to finance director Chris Cheetham. This adds weight to finnCap’s expectations that Scisys can boost pre-tax profits to £5.3m and lift EPS to 14p next year. On that basis, the shares are rated on a miserly 2019 forward PE ratio of 10.
As I noted last month, the company’s space division is flying, having secured a key €3.9m (£3.5m) 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 division has also secured contract extensions for 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.
Bearing in mind the nature of these contracts, the directors have put into action a contingency plan to enable the business to continue work on EU-funded projects post Brexit without adversely affecting impacting the ability of Scisys to continue contributing to space programmes funded by the European Space Agency, the UK Space Agency and other commercial operators. To do so, the company is in the process of re-domiciling to Dublin. It has been chosen due to the similarity in legal structure, and more importantly to give Scisys continued access for the participation in EU-funded projects while at the same time retaining UK sovereignty for the purposes of UK programmes and UK tax residency. This gives the company the best of all worlds.
Shareholders are being sent a circular to approve the plan at the end of this week which will see the company maintain its Aim listing, but under a new corporate structure. It clearly makes sense to approve the plan in order to protect shareholder value. Importantly, I fully expect Scisys's share price to recover the losses incurred since last month’s half-year results once the scheme becomes effective at the end of next month, and the penny drops with investors that the company will actually be a winner to emerge from Brexit.
Earnings growth and cash generation significantly undervalued
There is a lot to like about this company not least of which is its mightily impressive cash generation: net debt has been slashed from £9m to £3.3m in the past 12 months while at the same time the board have maintained a progressive dividend policy that has seen the payout hiked by at least 10 per cent a year since 2013. Analysts expect a payout of 2.4p this year.
It’s not just the space division that’s performing robustly, either. Scisys’s enterprise and defence arm has been buoyed by a raft of contracts including one with Vodafone (for developing a dashboard and reporting tool for the 111 non-emergency number), and recently landed a £2m award with Transport for London’s Future Bus Systems programme (to provide software design for timetabling and scheduling).
Furthermore, by combining Munich-based Annova Systems, a supplier of software-based editorial solutions to major European newsrooms including the BBC [acquired by Scisys at the end of 2016] with Scisys’s media and broadcast (M&B) unit, there should be scope to generate additional cross-selling opportunities and revenue synergies. I understand that German media group MDR, French commercial broadcaster RTL and the BBC all have contracts already with both divisions.
So, having first advised buying Scisys’s shares a year ago at 102p ('Tune into a media play', 11 Oct 2017), after which they hit a high of 199p at the end of July this year, I feel that the de-rating since last month’s half-year results (‘Scisys in a really good place’, 20 Sep 2018) is massively overdone.
Interestingly, the share price, at 145p on the offer, is close to the June 2018 low of 141p and very heavily oversold. For good measure, there is positive divergence on the chart, too, with the reading on the 14-day relative strength indicator (RSI) at the share price low made on 17 October higher than at the previous low on 11 October. That suggests to me that not only should a tradable rally be forthcoming shortly, but far more to boot. Buy.
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