System C Healthcare is a niche provider of IT products (48% of sales) and consultancy services to the British health and social-care sectors. The company is heavily involved in the £6bn National Programme for IT. In May it won a prestigious contract to develop and put in place clinical intelligence systems at a dozen NHS Trusts.
Its dependence on the NHS has recently been seen as a weakness, as investors fret over future public spending cuts. These fears were triggered in December when Alistair Darling told the BBC’s Andrew Marr Show that the flagship £12.7bn NHS IT project to introduce electronic patient records was “something I think we don’t need to go ahead with just now”.
But if this were true the government would have to fork out billions in compensation to cancel contracts. This scenario is therefore wide of the mark.
A more likely outcome is that while there will be budget reductions, these will be far more modest. Indeed, after the TV interview, the Treasury hurriedly explained that Labour was looking for “savings” of up to perhaps £600m (or 4.7%) over the medium term by scrapping some of the less critical features, rather than getting rid of it altogether. A senior official even added that “the Chancellor mis-spoke” by saying the project would be scrapped. Assuming this is correct, the 15% share-price drop caused by the initial sell-off is a buying opportunity.
System C Healthcare plc (Aim: SYS)
Despite the recession, System C churned out an outstanding set of interims in January. Like-for-like revenues rocketed 34%, with pre-tax profits shooting up 49%. Net cash came in at £16m (or 12.5p per diluted share), after the firm raised £12m at 48p a share in July. The main reason for this outperformance is that System C is locked into many essential public programmes. And its products offer clients real opportunities not simply to improve front-line services, but also to eliminate waste and reduce costs. Better still, chairman Jim Horsburgh said that, “trading had remained strong since the period end, and the company had a substantial pipeline of opportunities”.
House broker Charles Stanley is predicting 2010 turnover and underlying EPS of £36.1m and 4.5p, rising to £40.5m and 4.4p in 2011. So I’d value the stock using a ten-times Ebita multiple. After adding back the cash pile, that generates an intrinsic worth of 61p per share, representing over 20% upside from current levels.
Admittedly, the group could suffer a temporary black-eye from the disruption caused by a general election, especially given its heavy reliance on the NHS. Yet System C should be better insulated than most. Other risks are those typically associated with smallcaps and the implementation of large-scale, complex IT projects. These factors aside, the business has a rock solid balance sheet and must also be viewed as a possible takeover target – perhaps by foreign rivals, such as the Indian outsourcers, who may wish to muscle in on its blue-ribbon contracts.
Recommendation: speculative BUY at 48.5p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments