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SCISYS — An “impressive start” to 2018

SCISYS — An “impressive start” to 2018

SCISYS has released an upbeat AGM trading update, noting that progress has been made across all its four divisions. The order book has reached £100m, up from £91.3m at end-FY17, boosted in particular by the renewal of M&B’s BBC support contract. Cash flow was strong, with net debt declining by £4m over the first five months of the year, in what is typically a subdued period for cash generation. We have increased our FY18 operating cash flow forecast, while conservatively maintaining our other forecasts. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks increasingly conservative, and we believe the stock looks attractive on c 12.6x our FY19e EPS.

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Written by

SCISYS

An “impressive start” to 2018

AGM trading update

Software & comp services

29 June 2018

Price

160.5p

Market cap

£47m

Net debt (£m) at 31 May 2018

1.9

Shares in issue

29.5m

Free float (%)

63.7

Code

SSY

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.6)

23.5

65.5

Rel (local)

1.0

14.5

59.6

52-week high/low

182.0p

93.5p

Business description

SCISYS provides a range of professional services in support of the planning, development and use of computer systems in the space, media/broadcast and defence sectors, as well as to other public and private sector enterprises.

Next events

Interim results

20 September 2018

Analysts

Richard Jeans

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

SCISYS is a research client of Edison Investment Research Limited

SCISYS has released an upbeat AGM trading update, noting that progress has been made across all its four divisions. The order book has reached £100m, up from £91.3m at end-FY17, boosted in particular by the renewal of M&B’s BBC support contract. Cash flow was strong, with net debt declining by £4m over the first five months of the year, in what is typically a subdued period for cash generation. We have increased our FY18 operating cash flow forecast, while conservatively maintaining our other forecasts. Management’s goal to achieve £60m in revenues and double-digit margins within three to five years looks increasingly conservative, and we believe the stock looks attractive on c 12.6x our FY19e EPS.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

45.7

3.0

9.2

1.96

17.5

1.2

12/17

57.2

3.8

10.0

2.16

16.0

1.3

12/18e

53.0

4.4

12.0

2.38

13.3

1.5

12/19e

57.0

5.0

12.7

2.62

12.6

1.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. IFRS 15 is applied from 1 January 2018.

AGM update: Underpinned by impressive pipeline

The company says it has made an “impressive start” to 2018, with growth being achieved both through winning new customers and expanding business in established ones. FY18 is expected to be more evenly balanced than FY17.

Early end to ANNOVA ring-fencing

There is an early termination of the ring-fencing of ANNOVA, which relates to the acquisition earnout, at a cost of €0.7m. Clearly the vendors saw more value in a swift integration of ANNOVA with SCISYS M&B to take full advantage of synergies.

Brexit contingency plans

The company stands to lose significant revenues from its work on Galileo and EGNOS if Brexit proceeds without specific amendments. If this happens, we expect SCICYS to redomicile in an EU country at a cost in the region of c £0.5m.

Forecasts: Moving up FY18 cash generation

We have added the €0.7m final payment for the acquisition of ANNOVA and increased FY18 operating cash flow by £0.9m, and hence we now forecast the group to end FY18 with net debt of £3.0m (previously £3.3m).

Valuation: Profits maintained for now

The stock trades on c 13.3x our earnings in FY18e, falling to c 12.6x in FY19e. Alternatively, the stock trades on c 0.89x our FY19e sales and c 7.7x EBITDA, which we believe is attractive if SCISYS can maintain the momentum. Our DCF model – which is based on our forecasts and organic CAGR of 3% over 10 years, a weighted average cost of capital of 10% and an 11.5% long-term margin target – values the stock at 178p, 11% above the current level. This is 12% above our previous level, reflecting adjustment to the base and increased cash flow.

Trading update: Record order book and strong pipeline

SCISYS says it has made an “impressive start” to 2018, delivering on contracts that were part of the opening order book as well as winning notable new contracts. Growth has been achieved both through acquiring new customers and expanding business in established ones. The order book has reached £100m, up from £91.3m at end-FY17 and the company also states that it has an “impressive pipeline” of new business. The order book was boosted by the renewal of M&B’s BBC support contract, which we understand exceeds £10m. The £100m order book is much longer term than it used to be, including M&B’s BBC support revenues for the dira! running to 2025 and ANNOVA’s significant BBC contract, which runs to 2027. FY18 is expected to be more evenly balanced than FY17, when operating profit represented c 27% in H1 and 73% in H2.

In April, the Space division announced a €3.9m order with Airbus Defence & Space to develop the ground control infrastructure for the EGNOS satellite-navigation augmentation system. In addition, Space has extended its footprint in the EU’s Galileo satellite navigation programme. SCISYS says it has not experienced resistance from awarding authorities on EU space programmes where it has been bidding.

The Media & Broadcast (M&B) division reported in February that it had secured an enhanced service contract for the BBC until at least 2025 and has subsequently added six new German broadcasters to its customer base for roll-out of its weConnect gateway functionality to exchange media content within the ARD group of public broadcasters. ANNOVA Systems, acquired in December 2016, has signed contracts with German Hessischer Rundfunk and French L’Equipe 24, which are both new customers.

The Enterprise Solutions & Defence (ESD) division has extended its support agreements with Vodafone to 2020 and Capgemini to 2021, for the 111 non-emergency NHS number and the Environment Agency applications, respectively. In addition, ESD continues to expand its activities providing on-site consultancy teams to key customers in both the commercial and defence/security arenas, increasing the number of staff deployed by 95% in the last 12 months. This has resulted in extending the time & materials revenues and provided a better balance with fixed-price revenue.

ANNOVA early end to ring-fencing

SCISYS has agreed to the early termination of the ring-fence arrangement established for ANNOVA’s acquisition, which could have run to 31 December 2019. SCISYS will pay the vendors a fixed sum of €0.7m and repay a subordinated vendor loan of €2.5m six months early, which will save c £60k in interest. SCISYS had been anticipating that no further acquisition payments were likely under the terms of the earnout, so clearly the vendors saw more value in accelerating the integration of ANNOVA with M&B than in holding on for additional earnout payments.

Brexit contingency plans

In the 2017 annual report, SCISYS said it was exploring a wide range of Brexit contingency plans. The board is determined to protect the group’s participation in EU-funded programmes such as Galileo (c €6m revenues in each of the last two years) and EGNOS (a €3.9m contract was won in April). Under existing rules, services to these entities must be provided by entities that have parent companies domiciled in the EU. While the Brexit negotiations continue, with UK politicians pushing for continued involvement with Galileo, there is the possibility that Brexit will take place without a favourable resolution. In these circumstances, we understand that SCICYS would likely redomicile in an EU country. We estimate that this would cost the company in the region of c £0.5m, while it would remain listed on AIM as a foreign company and should be able to maintain its UK tax status. There has also been media speculation that the UK could start its own global navigation satellite system if it is shut out from Galileo; if this occurred it could create new work for SCISYS.

Exhibit 1: Financial summary

£'000s

2015

2016

2017

2018e

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

36,106

45,744

57,164

53,012

57,041

58,774

Cost of Sales

0

0

0

0

0

0

Gross Profit

36,106

45,744

57,164

53,012

57,041

58,774

EBITDA

 

 

1,548

3,995

5,619

6,097

6,627

6,922

Adjusted operating profit

 

 

818

3,214

4,520

4,983

5,472

5,761

Amort'n of acq'd intangibles

0

0

(1,982)

(1,250)

(1,200)

(1,150)

Exceptionals

0

(458)

2,075

0

0

0

Share based payments

(11)

14

0

(45)

(50)

(55)

Operating Profit

807

2,770

4,613

3,688

4,222

4,556

Net Interest

(196)

(185)

(710)

(567)

(450)

(400)

Associates

3

17

39

0

0

0

Profit Before Tax (norm)

 

 

625

3,046

3,849

4,416

5,022

5,361

Profit Before Tax (FRS 3)

 

 

614

2,602

3,942

3,121

3,772

4,156

Tax

(241)

(380)

(593)

(874)

(1,243)

(1,340)

Profit After Tax (norm)

384

2,666

3,256

3,542

3,779

4,021

Profit After Tax (FRS 3)

373

2,222

3,349

2,247

2,529

2,816

Average Number of Shares Outstanding (m)

29.0

29.0

29.2

29.4

29.7

30.0

EPS - normalised (p)

 

 

1.3

9.2

10.0

12.0

12.7

13.4

EPS - FRS 3 (p)

 

 

1.3

7.6

11.5

7.6

8.5

9.4

Dividend per share (p)

1.78

1.96

2.16

2.38

2.62

2.88

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

4.3

8.7

9.8

11.5

11.6

11.8

Operating Margin (%)

2.3

7.0

7.9

9.4

9.6

9.8

BALANCE SHEET

Fixed Assets

 

 

16,553

31,955

30,465

29,162

27,948

26,812

Intangible Assets

7,831

22,441

21,086

19,836

18,636

17,486

Tangible Assets

8,635

9,057

9,261

9,208

9,194

9,208

Deferred tax asset & associates

87

457

118

118

118

118

Current Assets

 

 

17,839

27,895

33,333

31,268

34,301

35,434

Stocks

211

261

321

298

320

330

Debtors

12,299

19,621

24,541

22,758

24,486

25,229

Cash

4,352

6,915

8,021

7,763

9,045

9,425

Current Liabilities

 

 

(12,003)

(18,763)

(23,481)

(22,034)

(23,274)

(23,494)

Creditors

(8,699)

(14,959)

(21,191)

(19,994)

(21,484)

(21,954)

Short term borrowings

(3,304)

(3,804)

(2,290)

(2,040)

(1,790)

(1,540)

Long Term Liabilities

 

 

(2,333)

(18,374)

(14,603)

(11,690)

(10,479)

(8,268)

Long term borrowings

(2,007)

(13,355)

(11,667)

(8,754)

(7,543)

(5,332)

Other long term liabilities

(326)

(5,019)

(2,936)

(2,936)

(2,936)

(2,936)

Net Assets

 

 

20,056

22,713

25,714

26,706

28,495

30,484

CASH FLOW

Operating Cash Flow

 

 

1,570

3,442

10,369

6,732

6,342

6,628

Net Interest

(196)

(185)

(710)

(567)

(450)

(400)

Tax

(583)

(1,250)

147

(930)

(1,283)

(1,405)

Capex

(619)

(663)

(1,255)

(1,060)

(1,141)

(1,175)

Acquisitions/disposals

(889)

(7,521)

82

(617)

0

0

Financing

(14)

15

(131)

0

0

0

Dividends

(340)

(671)

(586)

(652)

(725)

(806)

Net Cash Flow

(1,071)

(6,833)

7,916

2,905

2,743

2,841

Opening net debt/(cash)

 

 

(328)

959

10,244

5,936

3,031

288

Other including foreign exchange

(216)

(2,452)

(3,608)

0

0

0

Closing net debt/(cash)

 

 

959

10,244

5,936

3,031

288

(2,553)

Source: SCISYS, Edison Investment Research. Note: IFRS15 is applied from 1 January 2018.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SCISYS and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SCISYS and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Industrials

Severfield — Progress made, more expected

A good all-round performance in FY18 provided some positive markers of progress including rising UK margins, a steep step-up in the Indian JV order book and a special dividend declared for the year. While we acknowledge some sector variations, the overall trading outlook appears to be similarly robust and our estimates are modestly higher now. A c 4% near-term yield (ie final plus special DPS) is an obvious draw. Sector diversity provides resilience and additional growth potential in our view.

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