It was around five months ago that I last took a look at SysGroup (SYS) here, the stock then sitting around 30.5p, which saw me registering a marginal profit.
The shares however subsequently retraced to around 24p, where as a result I added further bringing my average down again and taking my holding to a sizeable amount in the context of my other investments.
Although recent months had seen little in the way of news from Sys or interest in the stock, that changed last week following firstly some huge trades going through.
This was then succeeded by a positive Trading Update along with the revelation of a new and highly interesting investor emerging on the share register as a significant holder.
That train of events resulted in the share price spiking northwards to a current 33.5p which whilst certainly welcomed by myself as a holder, sees the stock still looking cheap, as both a medium-longer term play.
For anyone taking a look for the first time, SysGroup is a buy-build business operating in the UK IT managed services sector, primarily concentrated on the mid-market size.
This sees the company providing various services from cloud hosting, to cyber security, consultancy services, along with value added resale of products and licences with a broad spread of customers and markets.
In its pre-close update ahead of its full year results for the year ended 31 March 2023, the company demonstrated progress that was in-line with market expectations, which was welcomed given the previous drifting southwards of the share price.
Following execution on its acquisition supported growth, Sys saw revenues increase by a significant 47% to £21.6m, which was supported by an element of organic growth at 6%, with the headline figures being ahead of the broker forecast of £20.5m.
Cash generation which has been positive across the group in the past continued in that vein and although following its previous two bolt-on buys there is a current net debt position of £1.3m, the balance sheet remains healthy enough.
Adjusted earnings for the year ended should come out at £3.3m, which is in-line with former broker Zeus expectations from its last note.
This sees adjusted EPS of 3.7p pencilled in, which provides for a PER of 9 at the current price which looks very good value given the growth potential ahead which is likely to be driven in part by further acquisitions.
There is currently nothing out in the market regarding forecasts for the year now commenced, as Sys recently moved to Liberum as its nominated advisor and broker and it has yet to initiate coverage.
I would guess that will happen in conjunction with the full year results announcement in a couple of months, although it is quite feasible that something will emerge ahead of that.
Having like others in the sector endured a tough time both through and post the pandemic, the performance last year was positive enough and the company stated that the final quarter had been strong, with momentum continuing into the current year.
That would appear to bode well for the year now in play and it should be able to build on the modest organic growth figure of last year, which actually wasn’t a bad outcome given the wider choppy economic conditions.
Perhaps though, one of the most intriguing aspects of the Sys story at present is the very recent selling and buying of shares from existing holders and a notable new investor.
The buyer comes in the form of Mr Heejae Chae, who is best known for successfully turning around and growing the specialist adhesive and tapes player Scapa. He was also prior to that, CEO at Volex and has extensive experience across both industry and finance.
So, his sudden emergence as a near 14% holder at Sys certainly piques the interest and adds additional flavour to the investment prospects, particularly as his move appears to have come largely out of the blue.
Catching up briefly with Sys CEO Adam Binks, I learnt that whilst he and the board were aware of the sellers, they were actually unaware as to who the buyer was, until the market was notified as there had been no prior contact.
The sellers in question I learnt were driven by their own specific fund issues which included an exit from the sector for one, along with redemptions for another and to a lesser degree sales by some discretionary clients, all of which opened the door for Chae, who I have subsequently learnt had been looking to buy in for some time.
With Sys being a fairly illiquid micro-cap, acquiring stock in quantity would always be problematic, so Chae has done well to achieve his aim, at what appears to be an average price of 27p.
The question now of course is exactly what are his intentions, will his presence be of a passive investment nature, or is he seeking a position on the board enabling him to perhaps play an active part and influence, regarding strategy and direction.
Time will no doubt tell and I’ll be keeping a close eye out for further notable trades here, which could provide an indicator as to how things may play out further ahead.
Either way, I view Mr Chae’s presence as a positive and it perhaps further highlights the potential upside here which he appears to have recognised, hence his interest and acquiring shares at what looks to have been a very good entry point.
Further acquisitions certainly look on the cards at Sys and the two most recent purchases, in the form of Truststream and Orchard look to have been excellent additions providing for further growth and specific synergies ahead.
With future guidance from Liberum yet to emerge, one can only guess at the expectations for the current financial year 2024, but if cash generation remains strong and earnings per-share of circa 3.9p were to be pencilled in, then the shares should continue to make progress further northwards.
Clearly the economic headwinds remain, but the picture looks a whole lot more promising than the previous few years where Sys and its peers have battled significant headwinds, so it is feasible that forecasts yet to emerge could prove more attractive.
its exposure to the sector