Hot Features
Premium
Trade like a pro: Leverage real-time discussions and market-moving ideas to outperform.
AIM listed SciSys (LSE:SSY) served up a pretty decent trading statement last week but I am told by the current management that this stock is too boring to be recommended in my normal outlet for share tips and so I bring this one to you on the house. You see, what young folks forget is that boring is good. Massive asset backing, strong cash conversion, solid organic growth, dividends are a lot better than stacks of goodwill, oodles of jam tomorrow, a reliance on acquisitions, etc. If you want that sort of stuff buy Facebook and regret it. On the other hand if you want to make money with a “boring” tip buy shares in SciSycs at 54p. My one year target is 84p ( plus another 1.3p in dividends). I can live with that sort of “boring” return. Can’t you?
The company is described as a leading developer of IT services, delivering robust real world application solutions and products and providing supporting services. It takes on a range of projects from a range of sectors so reducing risk. The projects tend to be pretty large and the operating margin is, I admit, not fantastic, at 6%. But it should edge up to 7% in 2013 and is at least fairly defensible.
Financials
Thanks to Finn Cap for these numbers which came out after last week’s trading statement (all on track)
| Year to Dec 31 | 2010 | 2011 | 2012F | 2013F |
| Sales £m | 43.6 | 42.3 | 45.1 | 47.2 |
| Normalised EBITDA £m | 2.8 | 3.1 | 3.6 | 4.3 |
| Normalised PBT £m | 2.0 | 2.2 | 2.4 | 3.0 |
| Tax Rate% | 29 | 11 | 15 | 15 |
| Normalised EPS (p) | 4.8 | 6.4 | 6.6 | 8.4 |
| Dividend Per Share | 1.1 | 1.2 | 1.3 | 1.4 |
| EPS Growth % | NA | 34.3 | 3.3 | 26 |
Now a few things leap out here.
1. Sales are not booming. I never said this was an exciting company but it delivers steady enough growth despite admitting that times are tough. It has a very strong forward order book so there is real visibility on 2012 numbers and a good bit of visibility already for 2013.
2. The company is keeping a tight grip on costs. And the purchase of the freehold on its head office ( discussed below) is also helping and this is causing margins to steadily widen – hence the growth in profitability projected.
3. Not in the table but cash conversion is very strong at 90% of profitability.
4. The tax rate is low thanks to the way sales made in Germany ( a key market ) are accounted for – and I note currency hedges are in place to counter the effects of a sliding Euro – and also because of the availability of UK R&D tax credits. Tax rates will stay low well beyond 2013.
5. I think that the Finn forecasts for 2012 are maybe a tad low. I would not be surprised to see earnings per share come in at closer to 7p
6. The dividend is increasing in real terms but is well covered by earnings and cashflow. There is scope to increase the rate of dividend growth and/or buy back a few shares for cancellation so increasing earnings.
Cashflow & Balance Sheet
The strong cash generation meant that at the end of 2010 the company was sitting on c£4.9 million of cash. Now an “exciting company” would have used that on acquisitions or aggressive buy backs. SciSys used it to buy the freehold of its head office so saving at least £500,000 a year. That could be more as some surplus space is let out as is already happening. Another couple of lets and you can start adding to those 2013 forecasts. With chairman Mike Love owning 14.5% of the equity expect such prudence to continue.
The balance sheet is strong. Cash will be building up from nil at the start of the year to ( I guess ) £1.5 million by Christmas. The office building has a clear value. Indeed overall NAV per share was 57.4p at the end of 2011, will be 63.1p this Christmas and 70.4p a year later. If we strip out goodwill, the Tangible Net Asset value was 37.2p at the end of 2012, will be 42.8p this Christmas and 50.2p a year later. With the shares at 54.5p that must limit the downside.
Valuation
At 54.5p the market cap is £15.8 million. This is a company that will have grown its earnings between 2010 and 2013 by 25% a year. That should not be a long term guide but with the margin set to inch ahead, the scope for small scale share buybacks and with sales likely to pick up in late 2013 onwards as the world economy starts to recover, I see no reason to expect earnings growth of at least 10% per annum from 2014 onwards.
Yet the shares trade on a 2013 price earnings ratio of just 6.5 ( on low FinnCap forecasts). For a growing company, with net cash, asset backing to limit downside and a 2013 yield of 2.6% as a bonus this just looks all wrong. I would be a buyer of the shares at 54.5p and at up to 60p with a one year target price of 10 times 2013 earnings – 84p. Chuck in a 1.3p dividend earned along the way and that is a fair old return for such a low risk play. Boring is cool. The shares are a buy.
