The IT projects specialist could re-rate substantially as earnings quality improves
Thursday 19 Apr 2018 Author: Steven Frazer

The market finally appears to have got over its Brexit hang-up regarding projects-based IT systems and services supplier SciSys (SSY:AIM). Helping to win back the market’s favour earlier this month was a €3.9m contract commitment from the European Space Agency (ESA) via contractor Airbus.

Yet there remains a huge valuation gap between the company and peers in price to earnings (PE) terms of more than 50% according to some analysts.

At 141p, SciSys is trading on a mere 12 times forecast earnings for 2018, and only 10.1 times 2019’s estimates. That compares to a typical 25 to 30-times multiple for many other UK quoted software businesses.

This discount is unwarranted given how SciSys’ earnings are moving forward. Pre-tax profit is expected to increase by nearly 16% this year to £4.4m; and by more than 18% to £5.2m in 2019.

The long-run nature of many of its contracts with blue-chip organisations, falling net debt, reliably decent dividends and ambitions to drive operating profit margins into double-digits (versus 2017’s 8%) are all supportive factors for a share price re-rating.

If you presume the rating moves up to 14-times over the next year, SciSys could therefore trade around the 190p mark based on earnings forecasts for 2019.

WHAT DOES IT DO?

Chippenham-based SciSys provides project-based IT skills and services to large public sector (the ESD division), broadcast media (M&B) and space industry clients.

The Ministry of Defence is a big public sector client, while it has worked for years with the previously mentioned ESA, including on its Galileo and Mars missions. SciSys also works with the satellites sector, a rapidly growing industry in the always-connected digital age.

With a substantially bolstered media division since the £23.8m acquisition of German business ANNOVA in November 2016, it now has another genuine growth arm. A 12-year deal with the
BBC was extended for another 10 years in February, helping Auntie to deliver local and national news, entertainment and archive material.

The order book at the end of 2017 was worth £91.3m, 41% higher than the year before. Organic growth opportunities may also be bolstered by bolt-on acquisitions.

Impressive cash flows (£8.5m of free cash flow in 2017) saw net debt cut to £5.9m at the year end. This should help maintain recent dividend growth in excess of 10%. There is a useful if modest 1.7% income yield but it demonstrates good financial discipline to shareholders.

Previously flagged as a Great Idea in Shares at 110.5p a little more than a year ago, we believe the stock offers further attractively-priced potential ahead so buy now. (SF)

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