SysGroup provides domestic cloud opportunity

SysGroup (SYS) is a small IT services business that is looking to grow through M&A. In this sector, customer acquisition is tricky, so acquiring businesses and then cross-selling them multiple services is a tried and tested strategy. In the past year, SysGroup has acquired cyber security company Truststream for £7.9mn and IT services business Orchard Computers for £1mn.

Management will be hoping to sell SysCloud 2.0 to its new customers. This is a full-service cloud offering that allows mid-market firms to run all their IT through a cloud platform managed by SysGroup. The company uses its own data centres – the largest of which is in Newport – to the host the services.

The acquisitions helped boost revenue by 49 per cent to £11.3mn and adjusted cash profit was up 25 per cent to £1.68mn. Organic growth was only in the single digits however,and on a statutory basis, the pre-tax figure swung from a profit of £0.25mn last year to a loss of £0.19mn. This was because an increase in debt pushed up finance costs by £191,000, as well as with £337,000 of “exceptional items” related to acquisition costs.

The company is still cash flow positive thanks to over a cash conversion rate of over 100 per cent. Cashflow from operations increased 46 per cent to £1.67mn from last year and with £4.2mn of cash in the bank there are opportunities for further acquisitions down the line.

With rising inflation pushing up costs, more small business should be looking to upgrade IT service and the SysCloud product will enable companies to streamline their IT services. An EV to sales ratio of 0.8 looks appealing but some more evidence of organic growth is needed. Hold.

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