Real growth
Increasing safety concerns in both the aviation and oil and gas industries support Simigon Ltd's (SIMI.LSE) growth outlook. The top and bottom lines grew 15-20% in 2013. New geographies and verticals should help at least maintain historical growth rates and the rising share of prime contractor revenues can enhance margins. SimiGon has a backlog that represents approximately two years of revenues. It is profitable and cash generative with a net cash position of $8m at June 2013. The P/E of 21.9x appears undemanding given the excellent visibility and high growth rate.
Destination China
SimiGon is well established in defence aviation, where it is a preferred supplier to 19 air forces worldwide and where the shifting regulatory and technological environment is driving increasing demand for advanced learning solutions. Earlier this year the company announced entry into the rapidly growing Chinese civil aviation market via a JV with a local aviation services partner, with an initial contact to provide licences worth $0.75m. In June 2013 the company won a $6.7m deal with an unnamed customer, to act as a prime contractor to deliver a SIMbox-based training solution. This order is significant; not only is it the largest in the company’s history, but it is in a major new region where it is the prime contractor and it is the first phase of a potentially larger contract. Reflecting this, the company’s overall backlog of June 2013 grew to $13.6m.
What are the implications?
Booz Allen estimates the Chinese aviation market is the world’s fastest growing, with the total number of aircraft growing by 10-20% a year. It should reach 2,500 by 2015 and almost 6,000 by 2020. The recently announced JV provides SimiGon with an excellent platform from which to capitalise on this potential with its unique product suite and proven technology.
Valuation: Undemanding given growth and visibility
January’s trading statement indicated revenue growth of at least 16% for 2013, in line with expectations, and net profit growth of 20%, slightly better than expected. The long-term nature of SimiGon’s contracts gives investors excellent visibility; additional contracts in new regions and products are an upside risk. The P/E multiple of 21.9x (vs the UK-listed software sector at 19.0x) appears undemanding given the current growth rate, margin potential and further growth opportunities.
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