SysGroup, the Liverpool based company focused on providing managed IT services that embraces cyber security released what looked like positive Interim results yesterday morning.
I last commented on the business here in April of this year, where I mentioned that with an average buy price of 33p, I was then under water.
However, with what I considered unwarranted share price weakness I recently averaged down, buying further at 21p, so my break-even price is now around 28p, which sees me marginally on the right side, with the shares recovering to a current 30.5p.
On the back of the results, I was fortunate enough to speak once again with CEO Adam Binks who expanded on some of the detail contained in the results for me, in what I view as a great medium-longer term play.
Firstly though, it is perhaps worth just taking a quick look at the headline numbers of what, being a buy-build-business is becoming an increasingly larger operation.
Total revenue for the H1 period increased 49.4% to £11.32m with adjusted EBITDA up 24.9% to £1.68m, whilst adjusted pre-tax profit came out at £1.10m against the corresponding period number of £0.96m.
The adjusted EPS figure was 2p, which looks very positive in terms of the full year expectations of 3.7p from broker Zeus, which already implies for a value proposition trading on a PE of just 8.
Although it is certainly always crucial to look at the various adjustments and I accept that some investors prefer to concentrate on the statutory numbers, I personally feel it is a fair enough measure in the context of growth/ buy-build companies such as Sys.
Indeed, operational cash flow generation was strong and the company retains a positive gross cash position of £4.22m despite ongoing investment across the business.
And, looking at the performance, it continues to demonstrate and deliver on a proven cash generation, with the ability to increase on scale moving forward.
Speaking with Adam Binks, the CEO tells me that despite it still being a tough environment out there, he sees the results as being decent and as part of that, he is extremely pleased with the two recent acquisitions.
On that front, he adds that both are already proving great businesses for Sys, where in the case of Orchard it has worked out well in terms of new heads with a positive integration.
Additionally, he says that recent difficulties in the hiring of new people across the wider group had eased somewhat, but adds that they still operate a strict criteria across the area of hiring.
In terms of the numbers that were announced yesterday, there was a notable increase in the lower margin VAR business (value added resale) which saw a 156% jump to £2.3m.
This was due to both the Orchard and Trustream acquisitions having what Binks describes as a higher proportion of VAR, particularly in the case of the latter.
This was already foreseen by management though and in turn, has seen a shift back to a 75%-25% mix, which Binks says is what they have actually always messaged.
Expanding further on the VAR element, the CEO says that the sales here are not those of hardware in the managed security services, but related to the sale of licences.
This does though see the tagging along of a licence purchase for other offerings, which in nine cases out of ten results in a managed services sale being secured too.
Binks adds that this results in Sys looking after and managing the software platform for the end customer, which as part of the process takes in the running and monitoring of all the security requirements.
Trustream he says, enjoyed a particularly good VAR period that was probably around £1m more than they would normally expect in terms of licence sales, so clearly a positive result.
Having like many in its field endured a tough time during the pandemic, the company more recently reported signs of green shoots emerging and whilst Binks points out that it is still a tough environment, Sys has performed solidly enough where importantly, that trend is continuing.
Organic growth of 4% was achieved which actually looks reasonable given the company has been emerging from the pandemic and the focus now will be on driving that forward where the historical sector average runs around 6%, but that is the pre-covid level.
The current pipeline of opportunities is also looking strong as trading for the second half is continuing with the more recent positive momentum, leading the company to expect to report full year numbers in-line with market expectations.
In terms of ARR (annual recurring revenue) this runs at 75% of the total group revenue and Binks points out that within this, Sys does not actually see a great degree of churn.
Typically, it does not relate to customer churn in the true context, but rather, contracts and specific business transactions as customers alter their product mix as opposed to actually departing, which suggests a high degree of stickiness.
Additionally, Binks expands, to say that at the present time they are not actually seeing as much of that happening as in the previous year.
As with any buy-build operation synergies can often prove to be a key element in accelerating overall performance and to this end the CEO says that they have already commenced the operational integration with the recent buys.
This, as a part, includes the taking out of costs from the Orchard business in relation to third party co-location data centres.
Across the board there has been ongoing operational investment that embraces sales, software applications and the cloud platform, which sees it well placed to further expand.
There has also been progress achieved at its Manchester arm which Binks says has taken them a while to get fully resourced and has probably taken some six months longer than he would really have liked.
Importantly though, he adds that they have got there and it is working effectively as a mechanism.
This, he adds, will sit within the wider business and that over the next twelve to eighteen months they should see some meaningful contribution from this operation.
There is also a word on SysCloud 2.0, the company's multi tenanted cloud platform which was launched earlier this year and which he says is all about delivering more for less.
The focus here, with what is effectively a major upgrade on the previous platform and where there has been notable investment is the capturing of opportunities around the increasing demand for computer storage.
As a result, they are now able to build on-demand, with a platform that works very well and faster, which Binks also says is more sleek and where customers are already seeing a performance benefit.
In relation to the current picture and moving ahead, the CEO tells me that the pipeline continues to grow, although deal cycles are still longer than what they have been in the past, which is perhaps a tail end legacy of the pandemic that should now begin to normalise over time.
On the subject of further acquisitions, the CEO says that although there is no deal in the frame at the moment, they are very much continuing to look at further prospects to add to the group in what remains a highly fragmented space.
In this respect, the company being hugely cash generative is well placed to execute further, thus adding to the building growth story which looks set to accelerate in the coming years.
For the year in play, Broker Zeus retains current guidance with a forecast of full year revenue of £20.5m and adjusted pre-tax profits of £2.4m with EPS at 3.7p.
Net debt, following the acquisition’s, is expected to come out at £4.1m, but given the strong performance on cash generation and health of the business looks comfortable, particularly in light of the already proven solid cash generative nature of the business.
All in all, the H1 results point to a solid performance with further ongoing growth and progress, where with a first half adjusted pre-tax profit of £1.1m already recorded it is looking comfortable on achieving the anticipated forecast numbers.
As a result, on current guidance the shares look very good value to me, trading on such a lowly PER and attractive PEG, particularly by sector averages.
In further making out the investment case, Zeus concludes, “Shares trade at 4.6x FY23 EV/EBITDA (incl. leases in EV, excl. contingent consideration), well below peer average of 6.4x and, in our view, not reflective of the Group’s attractive growth opportunities and cash generation. The average of our valuation estimates (peer mean EV/EBITDA, DCF, regression analysis) is 61.0p per share, or 106.5% upside to the latest closing price. In the long term, we believe the company could reach £50m in revenue and 30% EBITDA margins, with the scale provided by acquisitions and organic growth. Valuing this long-term potential EBITDA (£15m) at sector mean multiples (6.4x) indicates an enterprise value of c. £100m.”