SciSys provides complex IT services for the space (35% sales), military (21%), media (24%) and environmental (20%) sectors in the UK and Germany. Customers include the European Space Agency, Ministry of Defence, Environment Agency and the BBC. Its bread-and-butter business is developing ‘mission-critical’ IT services such as those needed to control satellites in orbit. The aim is to efficiently process the enormous data flows and distribute the information securely to the relevant users.
This focus on high-value niches allows SciSys to punch well above its weight. On 31 October, one of its close partners, Lockheed Martin, was awarded a £1bn order to upgrade the whole of the British army’s fleet of Warrior armoured vehicles. As a key part of the winning design team, SciSys should have an excellent chance of securing the associated sub-contract to install its clever electronics in hundreds of tanks over the next few years. That will significantly boost its already solid order book.
UK government austerity measures could put a brake on performance. However, 43% of the firm’s first half, £22m turnover was earned overseas. Indeed, all of its divisions enjoyed significant growth, with the exception of the environmental unit. There revenues fell from £4.4m to £2.5m, mainly as a result of its exposure to the public sector. More positively, work on the Galileo satellite-navigation system was completed successfully, resulting in significant follow-on orders.
SciSys (AIM: SSY)
Net borrowings were £2.4m as at June, reflecting this year’s purchase of the group’s headquarters for £5m. This will save an estimated £0.5m per year in rent and opens up the option of leasing out any excess space. House broker Canaccord is predicting 2011 turnover and underlying earnings per share of £45m and 4.9p respectively, jumping to £46 and 7.2p in 2012. The firm’s shares also offer a 2.4% dividend yield.
I value the stock on a nine times earnings before interest, tax and amortisation (EBITA) multiple, which, adjusting for balance sheet debt, produces an intrinsic worth of 63p a share.
There are potential risks. SciSys is exposed to the usual concerns surrounding small IT contractors, and could suffer if the economy takes another dive. Additionally, the shares are thinly traded, so beware of bidding up the price if you decide to buy.
However, with good long-term prospects overall, and scope to further lift operating margins, the company looks an attractive play for the more adventurous investor.