SYSGROUP set for the growth path - 30/07/25
- martinflitton1
- 1 hour ago
- 6 min read
Cybersecurity and all that goes with it has occupied much on the news front in recent months, thus, making it a potentially hot space for investor attention.
From a personal perspective, I tend to invest in, or concentrate on, those at the smaller cap end of the sector, particularly where current valuations appear to offer future upside.
As it stands, I hold shares in a couple of quoted companies across the aforementioned space, those being SWG (Shearwater) and (Sys) SysGroup, where in the case of SWG, I have recently enjoyed in excess of a 90% gain from my top up position made at 35p from December of last year.
Other purchases I undertook were in the low to mid 40p range, so for now, it is very much going the right way for me.
Previous comment on SWG from December 2024:
However, in the case of SysGroup, it is very much a case of waiting for some positive news to surface and the rerating this would inevitably bring, as for now, things remain in what is perhaps best described as turnaround mode.
As it stands, I have covered Sys a number of times here on the blog over recent years, having been invested for around five of those and where for the record, I added to my position last Friday after speaking once more with Executive Chairman and major shareholder Heejae Chae.
Despite delivering numbers that were in-line with market expectations, the outlook for the current financial year has seen a scaling back on previously guided numbers and forecasts, which resulted in the shares slipping 7% to 18.5p per share.
Although the downgrade was a disappointment, I remain positive on the medium to longer term prospects at the company and view the current valuation as representing an opportunity for future upside and rewarding returns.
Speaking with Heejae, he was understandably disappointed himself at having to reign in on near-term expectations, citing a tough economic backdrop, particularly across the SME space.
But, whilst on the surface there may not be much to get overly excited about as of yet, there would appear to be a number of positives running through the business which could pave the way for a marked reversal of the share price in due course.
The Chairman referred to the significant fundraise of last year as having provided a solid platform for the business to grow, with a net debt position eliminated, earn outs from a previous acquisition cleared, along with much needed investment in which to best position the business in order to succeed across a growth space.
In terms of the current climate, Heejae pointed to what is a tough market and that has as a result been hampered by delayed commitment or spend from customers.
“It is particularly hard for a company of our size in this environment and it only takes one or two contracts of large value to move the dial either way.”
Going further, he added that as they moved into the year there were some sizable opportunities on the contract front that they were hoping to land, but these unfortunately shifted or were shelved due to the customers own commitment to near term spend.
Whilst that has understandably and wisely resulted in the current cautious tone on expectations, Heejae also pointed to the inevitable reality that customers can only delay for so long, particularly given the increasing threats across the cybersecurity space.
Although the near-term pill may be a bitter one for investors to swallow, Heejae nevertheless remains positive and upbeat on the future and points to the biggest differentiator on the previous year, which relates to the level of customer churn that last year saw a hefty £1.7m number being suffered.
Such exits or cancellations don’t happen overnight, as customers have to give at least six months-notice before leaving.
The churn issue, is I was told, something that had been going on for a few years and prior to his arrival, meaning it was a key aspect that clearly needed to be addressed, dealt with and stemmed.
To this end, Heejae said that much of the erosion was due to an historic lack of customer service and satisfaction and that has subsequently very much been dealt with, resulting in the fourth quarter of last year and the first quarter of this year seeing managed numbers increasing for the first time.
Going further, he added the recognition that they now don’t have a £1.7m hole to dig out of as a result of that churn, which sees Sys in an altogether better place of positioning moving forwards.
Across the group as a whole the Chairman stressed that all of their top customers have, over recent months, renewed contracts which he points to as being a welcome demonstration of customer satisfaction.
“Our foundation is strong” he added, “and that gives me confidence in the transformation that we have undertaken.”
Speaking on how Sys had performed and was perceived on his arrival at the company a few years back he said, “we were just one of your typical 11k SME’s out there, being a deliverer of some products and services, but little or nothing else.”
The challenge therefore, was to evolve and migrate the business into one that provides more across the space, which includes the overlaying of specific AI tools on which to provide more solutions and services amongst other requirements across the industry.
Having historically primarily been a hosting business that was structurally declining, differentiating capabilities have been brought in, particularly across cybersecurity, cloud and protection activity, enabling Sys to now and in the future, best serve the growing customer needs.
A number of longstanding issues such as underinvestment and a level of disjointed performance capabilities have been addressed and concluded which should position the company for growth, concluding a period that Heejae commented felt akin to a turnaround project.
Looking ahead, Sys is also now in a stronger financial space than in prior years which should better position and enable it to grow, although some investors appear to fear the need for a future fundraise.
On this aspect, Heejae was happy to explain, “if you look at where and how we spend our cash, over the last year there was a £1.8m earn out requirement relating to the Truststream Cyber Security acquisition which was contractual and a one off.
There was also £0.7m in capital investment, including investment in our bespoke AI service desk platform, then additionally, there was also a £0.3m sum relating to the Crossword acquisition along with another £0.4m agreed contingent payment that also came through.”
Importantly, the internal investment of £0.7m is not repeating as with the other payments and Heejae added that they are well aware of where their working capital requirements are and that the business is not cash consumptive.
At the current time they are breaking even on the cash flow front and are comfortable that they are not burning cash as some might perceive.
The result is that the Chairman is firm in stating that they will not be coming back to the market for more cash, unless of course it was related to a big and major acquisition that would justify such a move.
Although there are clearly organic growth opportunities ahead and that remains an obvious objective, Heejae added that they very much want to achieve scale and in order to really reach that goal, further acquisitions would likely form a part of that.
However, he stressed that it needs to be absolutely right and bring something meaningful to the table such as a technology they don’t already have that would help leverage the business.
Equally, adding something onto the customer base enabling cross-selling opportunities is also highly important and provides for additional openings.
The purchase of crossword consulting appears to be a prime example of the direction and potential regarding additional arms to the group. It has, I was told, already added significant capabilities and new customers.
Heejae also feels that the cost structure which is now in place across the business can easily support £25m-£30m of turnover and as they are operationally geared, there is much to play for.
Gross margins have now positively increased to 48% against last years 45% and the Chairman highlights an increasing of the quality of revenue, which is now significantly better than what had been achieved previously.
The ultimate key though and which the Chairman readily accepts, is that the company now needs to grow, where if that can be demonstrated and with the fundamentals now in place, it will result in a step change in cash generation and profitability.
With gross cash of £8.7m that sees a net cash position of £3.6m after taking into consideration bank facilities, Sys looks comfortable and has the strength to ride the current more choppy economic waters.
As a demonstration of his confidence and belief in the business Heejae has this week made another significant share purchase of his own, with a further one million and fifty six thousand bought at 18p.
This sees him with plenty of skin in the game and he now holds 11.66% of the company.
The market cap of £15.7m at the current price looks too cheap to me, given the element of recurring revenue, prospects for growth and a management team that possesses the ability to deliver and drive cash generation.
Time will of course tell, but if Sys can deliver on some notable contract wins in the future and expand on its blue chip customer base, then the share price could be set to reside in a whole different place.
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