SYS ON THE FRONT FOOT - 16/04/26

There was a positive and welcome pre-close trading update from SysGroup earlier this week, and I have once again caught up with Executive Chairman Heejae Chae.

At a headline level, the key investment focus continues to be the group’s evolving ability to convert the operational improvement into sustained cash generation, as the business transitions from a repositioning phase into a more consistent earnings and cash delivery model.

My last note here was back in December and there, I outlined the steps the management team under Heejae has been taking to constructively reposition the business.

For readers new to the story, SysGroup is a UK-based IT services business that has been re-establishing itself in the secure cloud and cybersecurity space, offering integrated cloud hosting, managed IT, and cybersecurity services, alongside an expanding advisory capability.

Importantly, from an investment perspective cybersecurity and associated services have shifted markedly from the optional stage to one of being essential without compromise, given that almost every business now depends on digital systems.

Latest data in and around the sector points to the UK cybersecurity services market growing at a CAGR in excess of 10%, which provides Sys with ongoing opportunities.

Announcing its update for the year ending March 2026 Sys showed a better-than-expected performance, with revenue up 7% to £22.1m and adjusted EBITDA of £1.2m, ahead of broker expectations of £1.0m. Net cash also came in stronger at £2.7m, following the acquisition of Saxis.

While forecasts for FY27 remain unchanged for now, the broker has indicated they will be revisiting these following the full-year results in July.

Taken together, the recent outturn and the early momentum into the new financial year suggest the business is now very much operating on the front foot.

With that in mind, investors will be increasingly focused on whether this operational improvement can now translate into higher-quality earnings and, crucially, stronger cash conversion over time.

Heejae, as ever, is far from complacent despite the obvious progress, with the overarching theme continuing to be execution against the repositioning strategy that has been implemented over the past few years.

On last year’s performance, he highlighted progress across a number of fronts, including positive traction on the go-to-market strategy and a revamp of the team. He also pointed to significantly enhanced customer engagement, which began to feed through more meaningfully through the last quarter.

A reframing of how customers are approached and engaged with has been an integral part of this process, and it increasingly signals that the business overhaul is now providing a platform to capture incremental opportunities in a more scalable way.

Heejae was positive on the revenue growth outcome, along with a contribution from the Saxis acquisition, which was purchased for what looks like an increasingly attractive price.

Indeed, Saxis concluded a £1.1m post-acquisition win, which contributed to a 17% H2 year-on-year revenue increase.

Heejae views this as the “cherry on top” of an overall improving performance, which importantly also saw churn remain well controlled.

Within the mix, managed services continued to progress and will be covered further in the full-year results announcement, which will no doubt be eagerly awaited by holders of the shares.

Additionally, Heejae spoke positively around the AI element of the business, which has been aggressively embraced to both support and expand its footprint.

He noted that AI has now been effectively leveraged across the sales function, making teams more informed, efficient and proactive in their engagement with customers.

Importantly, this is also feeding through into the cost base.

The adoption of AI and automation has helped reduce overheads, including a marked reduction in headcount, while simultaneously improving productivity. This creates a dual benefit, supporting both margin expansion and operating leverage, which are increasingly central to the investment case.

Although tangible progress is clearly being made, the key focus for investors ultimately remains the conversion of the operational improvement into sustained cash generation.

At the end of the day, revenue growth, AI-led efficiency gains and margin expansion only matter insofar as they translate into durable free cash flow and visible balance sheet strength.

On that basis, the improving cost structure and operating leverage being built into the model are very much central to the investment case. Particularly as the group transitions from the stabilisation level to more consistent delivery of profit and cash generation.

Against that backdrop, investors will no doubt be looking closely for evidence that the recent operational gains are feeding through into higher-quality earnings over the coming financial year.

Having successfully concluded two small acquisitions over the last year or two in the form of Crossword Consulting and more recently Saxis, I was keen to hear whether further additions remain on the agenda.

Heejae said that acquisitions remain an important part of the strategy, and having successfully integrated both Crossword Consulting and Saxis into the group, it has given the business a greater level of operational maturity and execution confidence.

He added that the ability to onboard acquisitions has now accelerated, and the group is also developing internal AI tools to assist with the integration and scalability on that front.

There is also, he noted, a supportive tailwind emerging for the acquisition strategy, underpinned by fast evolving regulation.

This is particularly relevant in relation to Cyber Essentials, which from the end of April is increasingly being embedded into mandatory requirements for certain industries via secondary legislation and government procurement policies.

That will directly impact smaller MSPs, where compliance costs are likely to become more burdensome, particularly for businesses sub-£5m in scale.

The result is expected to be an increase in potential seller activity, with more smaller operators facing structural pressure, thereby improving the pipeline for bolt-on acquisitions in a fragmented market.

Heejae suggested this dynamic could tilt the market towards more sellers than buyers, which would be a supportive backdrop for SysGroup’s continued consolidation strategy.

For the full year concluded (2026), broker expectations remain at £22.1m revenue, £1.2m adjusted EBITDA and £0.4m adjusted PBT, with net cash of £2.7m.

Looking forward to FY27, forecasts currently stand at £24.3m revenue, £1.9m EBITDA and £1m adjusted PBT, alongside an improved net cash position of around £3m.

However, the key investment takeaway is that if the group delivers on or potentially exceeds these numbers, it should increasingly provide evidence of Sys transition towards consistent free cash generation.

In that scenario, earnings quality improves materially and the investment case provides for a shift further towards a cash-backed growth story rather than a restructuring recovery narrative.

Any upgrade cycle from here would therefore not just be about higher earnings, but about visibly stronger cash conversion and balance sheet resilience.