First up, I’ll touch on a very disappointing update from G4M last Thursday, which saw the shares savaged and now sees them standing at £2.35p.
Sadly, with such a sharp downgrade of circa 45%-48% from broker Singer for the current and successive year, the fall was inevitable and that sees the shares now below my original entry point of circa £2.80p and a long way off of the high achieved in the last twelve months of over £10.00p.
Thankfully, I top sliced at just over £7.00p which is something I often do in order to lock in some profits, should such a warning or other negative materialise.
Looking back at the November update, the warning signs were there, but from a personal perspective, I really didn’t see the situation as a falling knife, as I commented in my last piece.
To that end, I certainly got it wrong, but then it is inevitable in this business that sooner or later you will cop a warning or two on the investment journey.
As far as the business goes, I still believe it has decent long term prospects and it is perhaps worth noting that the market cap now stands at just £52m, which potentially makes it vulnerable to a an opportunistic bid from a competitor, should we see further weakness.
The shares now stand on a PER of 16 on this year’s revised forecast, so I believe they are worth monitoring, although squeezed consumer pockets and inflationary pressures suggest that now may be a good time to merely sit on the fence, or hold as I am doing with the remainder of my shares.
I’m sure though G4M won’t be the last across the retail sector landscape to warn the market on profits and it will be interesting to see just what transpires on that front in the coming months. Moving on, there has also been news from SysGroup based in Liverpool, which also has offices across the country where it is in the business of providing IT services, including cyber security and consultancy, along with cloud hosting.
As far as the shares go, they have hardly set the world alight over the last year or two and only recently moved up from a low point of 23p, following what looks to be a decent bolt-on acquisition to the group.
I have, what for me is a reasonable holding here with buys covering different levels, but where my average of 33p sees me under water at present.
I’m not concerned on that front though, as I bought in to this buy-build operation with a long term view and believe that upside will materialise in due course, so it really is a case of being patient.
Following on from the acquisition announced earlier this month, the company last week also issued a Trading Update to the market for the period ended 31 March 2022.
This saw the company expecting to report in-line numbers for the period, with adjusted EBITDA of £2.8m, whilst net cash is notably ahead of guidance at £3m as opposed to Shore Capital’s £1.8m forecast.
Although revenue will have reduced, which no doubt spooks some taking a look, it isn’t actually as negative as the headline may imply, particularly in the wider context of the group.
Speaking with CEO Adam Binks following the update, he informed me that the revenue reduction was very much down to the VAR element (Value Added Reseller) of the business.
Whilst this has come about as a direct result of the pandemic and is something they foresaw and envisaged continuing, Binks isn’t concerned, as the VAR contribution tends to be low margin as opposed to the other aspects of the business.
Those other parts he says are of a higher quality in both revenue and earnings and significantly enhanced delivering positive results on both gross and EBITDA margins. And at this juncture, it is perhaps important from an investment perspective to note that the business is, as the CEO points out, highly cash generative.
With all of the businesses now aligned under one umbrella, costs well controlled and an improving outlook, Sys looks ideally placed to return on the growth trajectory, not merely through acquisitions but organically too.
In terms of its current market valuation, even in these tough times the shares look very much on the cheap side, where adjusted pre-tax profits of £2m pencilled in on turnover of circa £18m and EPS of 3.3p sees Sys trading on a PER of under 9. Whilst some may suggest that a single digit rating is justified, due to the headwinds endured through the pandemic and to date, it is perhaps worth noting the performance of peers, including the much larger Iomart.
In the case of the latter where the shares stand at £174p, Iomart’s shares trade on a PER of 14 despite the company also suffering from headwinds.
On that basis Sys looks to being discounted too far, and a similar rating would see the shares trading at 45p per share as opposed to the current 28.5p.
The market cap here is also very modest at just £14m and within that there is the decent level of cash, so if the company can deliver in the new financial year on the back of what Binks describes as an improving picture, then the shares should surely rerate in due course.
The company has also recently changed its broker from Shore to Zeus and the new advisor will, Binks tells me, be issuing an initiation note at the time of the preliminary results in the summer.
Sys will also be embarking on a roadshow at this time along with participating in the excellent investor meet platform, which provides a decent opportunity for private investors to engage with the company.
Speaking with Binks and following on from the trading update statement, he amplified around the area of what he had described as the visible green shoots of recovery.
The CEO repeated that during the pandemic face to face interaction with customers had been virtually non existent, making new sales wins difficult, but now at last things were progressing despite some office environments taking longer to return to normal than others.
There has been increasing levels of engagement, which although he says hasn’t yet seen customers committing to the multi-million pound contracts they like to secure, they are nevertheless experiencing opportunities that are now being converted to revenue.
That appears to bode well going forward and it should be interesting to see just what numbers the new broker forecasts for the year now in progress, particularly with another fast growing business brought into the fold.
Speaking of the very latest acquisition, the CEO says that it has been great to get the deal done, which is excellent for the wider group, particularly as he added that it has been such a long time since the last purchase was made. “It isn’t something that has just recently come along as we had identified Trustream quite some time back and had been in conversations for a while“.
Trustream which operates in the cyber security space brings with it some notable customers including Virgin Money and has experienced rapid growth in recent years with demand for its cyber security solutions.
Binks says that Trustream will be a strong edition to the group and it really complements their existing portfolio of services where it enjoys strong levels of recurring revenue.
He adds “the integration of Trustream is already well underway and by the time we come out with the full year results in June, we will be providing the city with an update on exactly what we have done so far”.
Trustream he says is very different to anything that has been bought in the past and although it operates in the same sector it is in a different service set. Binks adds that it is doing very well and has grown very quickly over the last couple of years and says, “what we want to ensure is that they can continue to operate well under a plc structure and I am very comfortable with the way things are going at the moment".
Further acquisitions certainly remain high on the agenda and the CEO points out that he is always casting his eye over something, although as evidenced by the length of securing the recent deal, they are very much aware of making the right purchase and at the right price.
No doubt some eying a new broker on board may have expected a placing to support the Trustream purchase, or envisage that happening in the near future.
In the past, the CEO has told me that he wouldn’t want to raise at the levels the shares have been trading at and that there are other options open which has clearly been born out by the financing of the Trustream deal, which has been achieved by a combination of cash and debt.
In relation to the latter, he says that the company has seen strong support from its bank Santander with a new £8m facility in place which was previously an acquisition based revolving facility.
The newly agreed facility provides a working capital element, which although not needed, is, according to Binks very well structured and highly favourable to Sys.
He also says that given how well they generate cash without paying a dividend, they will be paying down the loan, although the bank has taken away the payment profile which means they actually don’t have repayment’s due on that for five years.
This provides the company with flexible options regarding further acquisitions, so it would appear that whilst a future placing may not be ruled out, it seems highly unlikely that it would be done anytime soon or at the kind of levels currently seen for the share price.
Expanding and speaking on the staff and culture at Sys, Binks says that they have a highly switched on and motivated team and they have just implemented a pay increase across the group as of the beginning of April.
This, he says, has been higher than what they have done in the past but it demonstrates commitment to their staff. “I think everybody has really had to do that and if they haven’t, they will suffer much higher levels of turnover that have been seen across many other industries. In the first quarter of the year we did see a higher level of people churn at the lower level of the ranks and it has been obvious that it is a candidate’s market. Having said that, we operate a strict recruitment practice and we are quite firm on that aspect”.
To this end, the CEO tells me that culture and a culture fit is something of a prerequisite across the business and that in the interview process at the very outset would be candidates have to submit a video of themselves before proceeding to next stage.
Looking ahead to June, Binks says that he is looking forward to undertaking the roadshow in conjunction with the new broker and sounds keen to boost Sys’s profile.
For what is essentially at present a micro cap business there are some impressive names on the shareholder list including Canaccord, Gresham, Herald and Downing which collectively account for close to 60% of the company.
Despite the shares rallying following the recent acquisition, Binks says that the valuation and price just isn’t at the level it should be.
Nevertheless, he believes that with them now having a good run rate number and maybe one or two more acquisitions to be secured, then that valuation will change.
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