In-line With Expectation Full-Year Results

Sanderson Group has announced full-year results that are in-line with our expectations, with revenue growing by 17% to £19.18m and adjusted operating profit increasing by 16% to £3.30m. The software and IT services company added that it is confident of making further progress and deliver trading results which are, at least, in-line with market expectations for the current financial year (FY16). Accordingly, we have updated are forecasts for FY16 and have issued forecasts for FY17. We continue to classify the shares as a hybrid growth and income stock, with the shares offering investors exposure to the high-growth Enterprise Resource Planning software market as well as a decent prospective dividend yield of 3.70%.

Full-Year Results

For the 12-months ended 30th September 2015, group gross profits increased by 16% as gross margins were maintained at 85% (2014: 85%), reflecting a continuing emphasis on the supply of Sanderson proprietary software and services. The group’s order book remained strong and at the year-end, stood at £2.35 million (2014: £2.41 million), providing a solid platform from which to achieve progress in the current financial year. Pre-contracted revenue increased by 11.5% to £9.77 million (2014: £8.76 million), representing 51% of total revenues. The gross margin from recurring revenue covered 67% of total group overheads in the year (2014: 71%). At year-end, the cash balance was £4.61 million (2014: £6.16 million). This strong cash generation has allowed Sanderson Group to increase its full-year DPS by 17% to 2.1p (2014: 1.80p), which is well covered by basic EPS of 3.4p (FY14: 3.1p).

Financial forecasts

For FY16, we continue to forecast revenue of £20.50m. We are assuming gross margins of 85%, leading to a gross profit forecast of £17.43m. We expect the group to continue its investment in product innovation, as well as sales & marketing, and are forecasting an adjusted EBIT of £3.69m. We are forecasting an interest charge of £200k and an acquisition-related finance charge of £80k, leading to an adjusted PBT of £3.46m. We are forecasting a DPS of 2.30p. For FY16, we are forecasting revenue of £21.50m and gross profit of £18.28m. We are forecasting an adjusted EBIT of £3.96m and adjusted PBT of £3.81m. We anticipate DPS of 2.5p.

Valuation

The shares are trading at a 33% discount to the Software & IT services sector on an EV/EBITDA basis (10.4x vs 15.5x). A key risk includes a deterioration in the economic environment.