Scisys ready for lift-off

Scisys provides software solutions to a range of niche markets, including space, defence, media and broadcast. Its prestigious client roster includes the European Space Agency and the BBC, and strong customer relationships means its divisions experience healthy levels of recurring revenue and repeat orders.

Recent trading has been impressive and a 41 percent rise in the year-end order book to a record £91.3m (£36.5m of which is due in 2018) suggests momentum will not be quick to abate. Ignoring £8.8m of sales that represent costs passed directly to customers at no profit, Scisys reported 28 per cent growth in professional fees last year to £48m. The result was buoyed both by excellent trading within its space division and a maiden contribution from Annova – a German newsroom software business bought in 2016.

The adjusted operating margin also climbed one percentage point to 8 per cent, with adjusted operating profits rising 44 per cent to £4.6m. A substantial increase in finance costs, reflecting debt taken on with the acquisition of Annova in 2016, and a noteworthy increase in tax paid, meant a more muted 9 per cent increase in underlying EPS to 10p.

All this took Scisys towards its medium-term targets: £60m sales and a double-digit margin. What's more, net debt has fallen markedly from £10.2m at the end of 2016 to £5.9m at the end of last year. And, while reported sales are expected to fall next year, this should not be a concern as it reflects the impact of new accounting standards (IFRS 15) on how the group records its no-profit, pass-through revenues.

True, Scisys has endured difficulties in the past. When we last covered the company way back in 2015, its half-year results revealed a £1.4m write-down on a large fixed-priced contract and a significant hit from the weakening euro – the currency in which its contracts were priced. Today, however, Scisys has reduced the impact of exchange-rate movements – thanks to Annova, whose contract with the BBC boosts sterling-based cash flows.

For management, Annova presents strong 'cross-fertilisation' opportunities with its media and broadcast (M&B) division. M&B itself enjoyed 9 per cent revenue growth to £8.7m last year, supported by international expansion. While the enterprise solutions and defence division saw a slight drop in sales to £16.5m, space was the star performer. Sales here rose 18 per cent to £23.5m and the order book more than doubled to £34.1m.

Space order wins are particularly encouraging as Brexit uncertainty could hurt this division, although management suggests the situation may potentially create extra business. A €3.9m (£3.4m) deal announced post-period-end with Airbus provides some further comfort, and Scisys is considering a number of potential strategies to mitigate potential Brexit upset, including re-domiciling the company while retaining its Alternative Investment Market (Aim) listing.