Sanderson Group: In-line With Expectation Full-Year Results

Sanderson Group has announced full-year results which are in-line with our expectations. We have adjusted our forecasts, mainly to reflect notional interest on the deferred consideration payment due in respect of One iota. We continue to be impressed by the high level of recurring revenues - which cover two-thirds of business overheads - a strong and growing range of products and services, a growing presence in the ecommerce and mobile commerce markets, a strengthened balance sheet and strong cash generation. Accordingly, we retain our buy stance, with a target price of 87p.

Full-Year Results

For the 12-months ended 30th September 2014, gross profit increased by 14.94% to £13.93m (FY13: £12.12m) as revenue increased by 18.68% to £16.41m (FY13: £13.83m). Gross margin reduced to 84.9% (FY13: 87.6%), but this was skewed somewhat by the delivery of two large infrastructure projects. Adjusted operating profit increased by 28% to £2.84m (FY13: £2.22m), leading to an adjusted pre-tax profit of £2.71m (FY13: £2.19m). The order book also remained good, growing by 24% to £2.41m (FY13: £1.94m), providing a solid platform from which to achieve further progress in the current financial year. The balance sheet and cash-flow remains strong, with no debt, cash of £6.16m (FY13: £3.66m) and 100% adjusted profit-to-operating cash conversion. The resilient operational performance, combined with the strong balance sheet and readily available cash resources, has allowed Sanderson Group to increase its full-year DPS by 20% to 1.80p (FY13: 1.50p), which is well covered by basic EPS of 3.1p (FY13: 3.9p).

Financial forecasts

For FY15, we continue to forecast revenue of £17.30m. We are assuming gross margins of 86%, leading to a gross profit forecast of £14.88m. We expect the group to continue its investment in product innovation, as well as sales & marketing, and are forecasting an adjusted EBIT of £3.39m. We are forecasting a higher interest charge of £250k, leading to an adjusted PBT of £3.14m. We are forecasting a DPS of 1.90p. For FY16, we are forecasting revenue of £18.50m and gross profit of £15.73m. With further product innovation and sales & marketing investments anticipated, we are forecasting an adjusted EBIT of £3.60m and adjusted PBT of £3.30m. We anticipate DPS of 2.0p.

Valuation

Given the strong progress made, we now consider a rating of 15 times forward earnings + net cash as justifiable for setting our target price of 87p. The prospective yield of 2.90% is also attractive.