SCISYS: Broadly In Line, Forecasts Maintained

SCISYS (SSY.L) recorded a resilient performance in FY12 despite the challenging backdrop, with adjusted operating profit lifting 13% to £2.7m and operating margins approaching 7%. This was in spite of lower revenues which reflected the planned reduction in low-margin hardware and software re-sales. The group continued its strong cash-generation profile, swinging from a small net debt position at 1 January to £1.2m net cash at year end, in spite of spending c £2m on an acquisition. The shares are attractively rated, trading on a modest single digit P/E and a FY13 FCF yield of c 14% and our DCF model suggests a valuation of 100p. Management has shown its optimism by boosting the dividend by 9% to 1.32p.


Investment case: Margins expand, 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 that SCISYS creates for clients has been 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 it in 2011 for £5m. SCISYS has a pipeline of potential acquisitions and the small but strategically important MakaluMedia deal announced in October gives a flavour of the value-creating opportunities that are possible.

Final results: Broadly in line, forecasts maintained
FY12 numbers were broadly in line with our forecasts, with adjusted operating profit and EPS in line, revenue below (in January, we reduced it from £44.0m to £41.0m) and year-end cash of £1.2m above (we had £0.2m net debt). Operating cash flow was helped by favourable movements relating to the MakaluMedia acquisition and an exceptionally strong cash collection in December. A strong performance by the government and defence division balanced weakness across the other divisions.

Valuation: Single-digit FY13 P/E, strong balance sheet
We are maintaining our forecasts and longer-term 7.9% margin target. The stock trades on c 0.4x our FY14 revenue forecasts and marginally above the 62p book value, making the shares look attractive given the last five years of margin improvements and healthy cash generation. We anticipate the valuation will expand with margin and earnings momentum, and based on our forecasts, the stock trades on 7.4x earnings in FY13, falling to 7.2x in FY14 and to 7.1x in FY15.

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