SysGroup, the managed IT services and cloud hosting provider, delivered a pre-close Trading Update to the market this morning that suggested the company is well placed for growth in the coming years.
Ahead of delivering its full year results to 31 March 2021, the company revealed that trading had proved resilient given the harsh economic backdrop, that early last year had seen forecasts suspended due to the onset of Covid. As a result of strong cost control and acquisition synergies, adjusted EBITDA is now expected to come in slightly ahead of broker Shore Capital’s forecast of £2.8m, despite the previously highlighted drop in revenue.
Additionally, the cash position has improved from the corresponding period as of March 2020 moving to £3.47m against £3.04m as operating cash generation has been strong.
Clearly, as with others, 2020 has presented significant challenges for Sys, but it appears to have weathered these well and from the tone of the statement looks well placed to resume on the growth path.
On the back of the announcement, I have once again been fortunate enough to catch up with CEO Adam Binks, in order to hear more on the current picture and forward prospects.
In relation to the second half of last year Binks says, “H2 is usually a stronger period for us but was unusually flat, largely driven by the VAR aspect of the business. During that period we also had the full lockdown of November, then the tier system in place, so under the circumstances I really think we have done a fantastic job”.
The CEO also adds that they could quite possibly have seen businesses going into administration, but fortunately that hasn’t happened across their customer base.
In terms of moving forward, Binks sounds cautiously optimistic as Sys has a good opportunity pipeline and as the economy has began to open up again, so too it provides for a better environment for a sales team to operate in. “We have conducted conversations with customers across the likes of Zoom in order to drive sales, but we hope that by H2 of this year we will actually be back in front of customers. Within the situation though, it is worth remembering that it has been IT that has largely kept the country going and whereas in the past businesses have seen IT as a cost they are now actually seeing that it needs to be an investment”.
Such sentiment from existing and potential customers should bode well for the company going forward and there is clearly a belief in the growth prospects across the company and the opportunity’s that exist.
As part of executing on those opportunities, the company recently revealed that it was opening an office in Manchester which Binks sees as being a good and disruptive move.
Manchester is well known as the second largest tech hub outside of London and the CEO believes now is very much the right time to be making the move on the back of a cash investment.
He said, “I’m confident that over the next couple of years Manchester will do great things for us and I hope to see it expand quicker than in the plans I have previously stated”.
Although organic growth is a key element of the business the CEO readily acknowledges that Sys remains a buy and build operation in a highly fragmented market and that they continue to evaluate opportunities.
He points out that they could potentially have done deals during the last year, but that all the boxes need to be ticked and thus far that hasn’t happened. “I have a very, very, strong stance on getting the right deal and it has to be absolutely right for the business and for the shareholders, so I’m not into doing deals just for the sake of it. We are well funded have our own cash, debt facilities and strong institutional support and we expect to be a significant player in a market place where it is fragmented, so we are keen to add to the business”.
Shore Capital has released a note this morning but will update more extensively and on number guidance following the results to be delivered in the summer.
For now though, it highlights that Sys trades on a modest 6.7x EV/EBITDA for full year 2021 and that it sees the shares as highly geared towards the structural growth opportunity around digital transformation generally, and managed IT services in particular, and the associated growth profile.
The Group's strategy remains consistent and compelling: to expand its position as a trusted provider of Managed IT Services to clients in the UK. Progress to date bodes well and we look forward to further news flow.
The broker also expects the recent Covid disrupted period to give way to further growth as conditions normalise, noting management being “confident of delivering further growth entering the new financial year and as lockdown restrictions ease further”.
The broker also adds, among other factors, there remains a pressing need for business leaders to accelerate their digital transformation journeys – and one of the fastest and most efficient ways for them to achieve this, in our view, is to turn to outsourcing managed IT services.
Sys shares are off a penny today at 41.5p, with a market cap of £20m where they currently trade on a PER of 12 which looks good value when compared to the sector average and peers.