SCISYS Interim Results

SCISYS has reported an in line set of interim results, with adjusted operating profit up 8% at £1.3m. Margins improved by 85bp as revenues dipped by 11%. The revenue decline reflected a very strong comparative period along with a reduction in low margin product re-sales and the weaker euro. The order book is healthy at £25.3m in July, up 8% over the year, with particularly strong positions in the Space and Government & Defence divisions. Our maintained profits forecasts and margin target suggests a valuation of c 87p or 53% above the current share price.

Investment Case: Margin Expansion With Growth Prospects
SCISYS is a leading developer of ICT services, e-business and advanced technology solutions and operates in a broad range of market sectors. Software development is generally customer funded through projects and the board is placing a greater emphasis on re-using software that has been developed in previous projects. Further, the renewed focus on process, project management and taking a better share of the ROI SCISYS creates for clients is helping to increase margins. The group has a strong balance sheet that includes the freehold on its Chippenham HQ, which was sold in 2007 for £9m and the group repurchased in May 2011 for £5m.

Interim Results: Profits Up Despite The Headwinds
Group revenue slipped 11% to £19.6m while adjusted operating profit rose 8% to £1.3m as the operating margin improved by 85bp to 6.4%. The German unit put on a particularly robust performance as the Media & Broadcast division, which is based in Germany, recorded the standout performance with its professional fees growing and contribution rising 60% to £2.0m. The group saw an unwinding of working capital in H1, following an exceptionally strong cash collection in December, which resulted in the group moving to a £0.8m net debt position in June (zero as at December 2011). The dividend is bumped up by 11% to 0.4p, reflecting management’s optimism.

Valuation: Appealing On Low P/E And Below NAV
We have cut our FY12 and FY13 revenues by £2.1m in each year to reflect lower product re-sales and the weaker euro, while maintaining our operating profit forecasts and longer-term 7.5% margin target. The stock trades on c 0.4x our FY13 revenue forecasts and below the 59p book value, making the shares look attractive given the last four years of margin improvements and healthy cash generation. We anticipate the valuation will expand with margin momentum and, based on our forecasts, the stock trades on 8.2x earnings in FY12, falling to 7.1x in FY13 and to 6.9x in FY14.

To Read the Entire Report Please Click on the pdf File Below.