Interactive Investor

How Scisys can deliver 45% share price upside

30th March 2017 14:05

Lee Wild from interactive investor

Buying German newsroom software supplier Annova late last year topped off a great 2016 for AIM-listed Scisys. It was a bold move and one that rightly buried the contract slip-up a year earlier deep into the history books. Up over 50% in the past 12 months, Scisys shares are currently in a holding pattern, but full-year results were strong and analysts are convinced there's much more upside here.

Doing half its business in mainland Europe gave numbers a boost, flattered by earnings in euros converted back into weaker pounds sterling. Revenue in 2016 was up a better-than-expected 27% at a record £45.7 million, and adjusted operating profit quadrupled to £3.2 million.

However, strip out the currency gain and sales still rose 17%, and recent contract wins have helped keep up the momentum built during the second half of last year. Adjusted operating margin improved to historic levels at 7% from just 2% in 2015 when mispricing a contract cost it dear.

Factor in both the new Annova business and deals with the BBC, Ministry of Defence and Vodafone, and management remains confident of beefing up both the top and bottom line in 2017.

"After a relatively sluggish first half-year, 2016 has gone from strength to strength with repeated upgrades in expectations and, if unrealised hedging losses are excluded, it ranks as our most profitable year on record," says finance director Chris Cheetham.

"With a substantial proportion of budgeted revenues for 2017 underpinned by a strong opening order book and with the addition of Annova to the group's ranks, the outlook for the coming year is even more encouraging."

And bosses have brushed off concerns about Brexit and its possible impact on EU-funded programmes – Scisys works on a lot of space projects, including The European Galileo programme - these results coming a day after Theresa May triggered Article 50 and the UK's two-year exit from the EU.

"We're not immune," chief executive Klaus Heidrich tells me, "but from what we see, being established both in the UK and Germany seems very, very good protection".

Higher margin business Annova will certainly help get return on sales into double-digits medium-term, claims Heidrich, and its more product-focused approach is being replicated across the company.

House broker finnCap points out that the strong sales growth and margin improvement was entirely organic, spread across all three major divisions - Enterprise Solutions & Defence ("an engine for organic growth," says Scisys), Media & Broadcast and Space.

Repeating his 'buy' rating and 155p price target, analyst Lorne Daniel reckons Annova "should continue to drive excellent growth and enhanced margins from the high-quality IT services business".

Adjusted pre-tax profit is tipped to growth from £3 million to £4 million in 2017, then £4.4 million next year. That gives double-digit forecast earnings per share (EPS) growth to 11p and 12.1p, putting Scisys on only 9.7 times forward earnings, dropping to 8.8.

Even on that price target of 155p, Scisys would only trade on 14 times earnings, hardly eye-popping, especially if it grows earnings as expected. If Annova fulfils its potential, it could be more.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.