Companies embarking on a Buy and Build strategy for growth may not exactly be everyone’s cup of tea, although from a personal perspective, the model is often in my view wrongly maligned.
Over the years I have achieved some impressive gains from such investments, including Accumuli which was subsequently acquired itself by a larger player, along with SDI Group which is continuing to grow strongly in its own right.
With those and indeed others in mind, I am now hopeful that I have identified another potential winner moving forward, although shares in AIM quoted IT services company SYS Group have to date hardly set the world alight and are at present very much largely off the wider investor.
That may be about to change though, as following recently delivered and positive Interim results that has seen broker Shore Capital reinstating forecasts for full year 2021, the company looks well set for both near and longer term progress and is arguably worthy of closer scrutiny, if not an interest.
Adam Binks is the CEO at SYS, where having been appointed back in 2018, he has overseen revenue growth that has increased from £10m to £19m and where he is determined to drive that considerably higher.
Catching up with Binks in order to gain further insight into the company and its prospects, it is clear from the outset that the CEO is both passionate about the business and importantly, determined to drive it further forward where the goal is to see it become a £100m company within the next three years.
Currently, SYS sits with a lowly market cap of little more than £16m, so there is clearly someway to go yet in order to hit such heights, although it is a goal that Binks clearly believes can be achieved.
The company operates in the area of managed IT services and cloud hosting where Binks informs me that SYS serves some seven hundred mid-market customers providing managed IT and cloud hosting services being described as a bespoke technical architecture.
“We have solid vendor accreditation with the likes of Dell and WatchGuard which is very important” says Binks “and we provide end user support infrastructure across a cloud platform to customers where as part of that process it sees us operating three data centres across the UK”.
Importantly, the company has what Binks describes as a very low churn rate and with recurring revenue running in excess of 80% of the total, SYS looks to be in a decent spot on which to demonstrate further on growth and an increasing generation of cash.
Having concluded three acquisitions since 2017 including the largest of those in the form of Certus purchased for £8m and which brought with it customers such as Admiral and AXA, Binks isn’t about to rest on his laurels anytime soon.
“We are absolutely still looking at further acquisitions and we are in a good place to deliver on that” he says. “We are ready to do deals as it is a very fragmented space, but within that we operate on a strict criteria, so there have to be sensible earnings which will be earning enhancing to the company”.
In terms of funding future deals the CEO says that SYS has the firepower with differing options, as there is currently gross cash of £3.8m on the balance sheet along with an as yet undrawn £3.5m facility with Santander.
He says that the determining factor on funding any acquisition will be the size of that and the potential for an equity raise only appears likely for what Binks describes as any larger transformational deal emerging. “We are mindful of dilution to shareholders and we have those other options to deliver on any acquisition, depending on what we wish to buy and the size of a business”.
Despite many sectors having been adversely affected by the pandemic issues, SYS has ridden the wave relatively well, where having not furloughed any staff, or utilised government loans it also delivered commendable interim results, that sees it on track to hit now reinstated full year 2021 guidance.
This has seen broker Shore Capital pencil in full year revenue of £18.9m with adjusted EBITDA at £2.8m, pre-tax profit of £2m and EPS of 3.3p, which should also see a net cash position of £1.8m.
At a current 36p the shares trade on a PER of 11 which is hardly demanding for a company that is generating cash and operating in a hot growth sector, therefore arguably suggesting that there should be significant upside potential on offer in the coming years.
“IT operations are very much at the forefront of peoples minds and becoming increasingly important, so that provides us with a vast opportunity” Binks says, where it would appear there are also plenty of potential acquisition targets out in the market place.
Despite the Covid situation impacting on businesses and their IT spend to a certain degree, the industry view is very much that investment will now begin accelerating with an increase of digital transformation to support new and increasing models which will in turn benefit the likes of SYS.
The company is certainly well placed and Binks explains that the acquisitions made in recent years are now well integrated and providing for further growth opportunities as they move forward.
He also explains that a number of small or low margin aspects of business that had been inherited from acquisitions have subsequently been exited from and that has been the case over the last year.
The CEO adds that although this has had some near term impact on revenue, there is only a minimal result on profitability and moving forward it further underlines a commitment to higher margin business that will in turn translate into increased profit.
Expanding on the integration of acquisitions Binks adds, “Through our fusion project, we have pulled all the differing systems into one fit for the entire customer base, this has been ongoing, is now live and operational”.
With such a unified platform of systems running across the group which houses multiple workstreams covering the likes of service desk, financial accounts and marketing there is improved efficiency and working practices with a high level of operation and reporting of information.
With hundreds of customers of varying sizes Binks points out that the largest customer only accounts for 3.5% of revenue whilst the top thirty do not account for more than 20% and the company’s exposure to leisure and hospitality is only 6% of the total.
That provides for a level of comfort in what have been difficult times for most and suggests that SYS remains well placed to continue on its growth path which, given the fall out from the pandemic and changing habits such as increased remote working should see demand for its services increasing.
At present there is a product split of 80% being focused on Managed Services with 20% on Value Added Reselling (VAR) where the latter was more affected during lockdown and which sees a lower level of margins. Despite VAR having been impacted in the early months of Covid, activity levels have steadily increased since July and the prospects for this area look to be brighter, although the real thrust for SYS is the larger Managed Services division.
Here, during the Interim period recurring revenues increased to £7.46m amounting to some 83% of total income and continued without disruption, as team members were able to work remotely providing uninterrupted service and support to customers during a critical period.
For a company with such a small market cap, SYS nevertheless boasts some impressive Institutional holders on board including Gresham House, Herald and Helium to name but a few and Binks says that they are very supportive of the business.
The CEO acknowledges though that the company is perhaps presently off the wider private investor field of vision, but aims to see that change with an intention of increasing on the presentation front and a reaching out to a wider audience. Having already recently bought into the story, I am inclined to increase my holding further as and when additional news emerges.
Given the current valuation against the recent numbers and prospects moving forward, the risk/reward investment case looks skewed to the latter for this holder.