Scisys (SSY:160p), a supplier of bespoke software systems to the media, space, defence and commercial sectors, has more than delivered on the expectations I outlined when I suggested buying the shares, at 102p, less than 18 months ago ('Tune into a media play', 11 October 2017).
Reflecting a raft of contract wins across all three segments of the business, the company’s annual underlying operating profit increased by 16 per cent to £5.1m on revenues up 10 per cent to £58.4m. Moreover, a net operating cash inflow of £5.4m in 2018 enabled Scisys to slash borrowings by almost half to £3.1m and cut the interest bill by 30 per cent to £0.5m, so more of the profit is being retained by shareholders. This helps explain why fully-diluted adjusted earnings per share (EPS) increased by almost 40 per cent to 12.8p, an outcome that enabled the board to hike the dividend per share from 2.16p to 2.38p, thus maintaining a dividend policy that has seen the payout hiked by at least 10 per cent a year since 2013.
Analysts at house broker finnCap expect a payout of 2.6p this year based on a 9 per cent rise in EPS of 14p and Scisys delivering operating profit of £5.5m on revenues of £62m. On this basis, the shares are rated on a forward PE ratio of 11.5 and offer a 1.6 per cent prospective dividend yield. That’s a low rating for a company that ended 2018 with a record order of £98m, of which £41m is for delivery this year, and continues to win new work.
Chief executive Klaus Heidrich revealed during our results call this morning that Scisys’ enterprise solution division is likely to have won £6m to £8m new contracts in the first quarter this year, a healthy sum in relation to its 2018 closing order book of £12m. Current projects include a contract with Vodafone (for developing a dashboard and reporting tool for the 111 non-emergency number), and a £2m award with Transport for London’s Future Bus Systems programme (to provide software design for timetabling and scheduling).
Scisys’ space division is flying too. Indeed, having Brexit proofed this operationby redomiciling the company to Dublin last autumn, Scisys has been winning a raft of contracts on European Space Agency (ESA) funded projects. In fact, it subsequently won €23.3m (£20m) of new space contracts to lift the division’s order book to £40m. These include an 18-month award worth €11.2m from Thales Alenia Space France (TASF), the prime contractor to the ESA for work on improving security and cyber resilience capabilities in the next phase of the Galileo programme, and two further orders from TASF worth €3m.
Scisys’ media and broadcast division has been winning new work too, landing a 10-year extension worth £20m to its current contract with the BBC for the supply of audio broadcast technology, and receiving orders from 11 of its existing 13 German public broadcasting clients for a new content-distribution platform product.
I would also flag up that although Scisys has moved to IFRS15 accounting, under the previous accounting standard it would have hit its £60m revenue target two years earlier than planned. The board have just outlined their 2022 target of achieving £75m of revenue and operating profit of £7m. Furthermore, with net debt less than 12 per cent of shareholders funds, and the company paying down a low-cost €6m (£5m) Deutsche Bank loan fixed at 2.9 per cent a year, there is an opportunity to deploy some of the free cash on Scisys' balance sheet on earnings accretive acquisitions.
So, having upgraded my target price to 230p when I last covered the investment case (‘Scisys on a mission for highly profitable growth’, 21 January 2019), I maintain my earlier view that Scisys is a real Brexit winner (‘Exploit a Brexit winner’, 24 October 2018). Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed onwww.ypdbooks.com.
