Sanderson Group: Complementary Acquisition

Sanderson Group has acquired Birmingham-based warehouse management software provider, Proteus Software, for a maximum consideration of £1.9m. We feel that given how Proteus’ offerings complement Sanderson’s existing products, the acquisition offers the opportunity to benefit from both cross-sell and cost cutting opportunities. We also note that there is an opportunity for Proteus to operate as a standalone business. Accordingly, we have adjusted our forecasts, mainly to reflect higher expected revenue and profits, and retained our buy stance, with a target price of 87p.

Acquisition

The consideration is payable in cash and comprises of an initial payment of £1.40m on completion and a deferred consideration of up to £500k (being payable in 2016), depending upon certain performance criteria being met in the 12-months to 5th December 2015. Proteus reported revenue of £1.98m and a loss before taxation of £3k for the year ended 30th September 2014. Net assets were £0.59m as at 30th September, and £600k as at the date of the acquisition (5th December 2014), of which cash represented just over £400k. Accordingly, assuming all targets are met, the deal represents a Proteus Enterprise Value of £1.50m and an EV/sales ratio of 0.76x.

Financial forecasts

Updating our forecasts, we are now forecasting revenue of £18.50m (previously £17.30m) on a gross profit of £15.98m (previously £14.88m) for FY15. We understand that Proteus’s gross margins are in-line Sanderson’s. We expect the group to continue its investment in product innovation, as well as sales & marketing, and are now forecasting an adjusted EBIT of £3.43m
(previously £3.39m) and adjusted PBT of £3.18m (previously £3.14m). We are forecasting a DPS of 1.90p. For FY16, we are now forecasting revenue of £20.50m (previously £18.50m) and gross profit of £17.43m (previously £15.73m). With further product innovation and sales & marketing investments anticipated, we are forecasting an adjusted EBIT of £3.71m (previously
£3.60m) and adjusted PBT of £3.40m (previously £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 2.94% is also attractive.