Sanderson Group: Interims

Sanderson Group has announced its interim results. The results are in-line with our expectations, reflecting further progress on an operational level, with both revenues and operating profits increasing by more than 13% during the six-month period ended 31st March 2015. The balance sheet remained strong, enabling Sanderson to maintain its progressive dividend policy and increase its dividend payment by 12.5% to 0.9p per share. The strong order book and healthy balance sheet, together with a long list of sales prospects, provides us with further confidence in our slightly amended forecasts. With the shares offering investors exposure to the high-growth Enterprise Resource Planning software market, as well as offering a decent dividend yield of 3.03%, we continue to classify the shares as a hybrid growth and income stock.

Interims

For the six-month period, revenue increased by 14% to £9.09m (H1 2014: £7.94m) and operating profit improved by 13% to £1.37m (H1 2014: £1.21m). Pre-contracted licence and ongoing support services recurring revenue grew to £4.76m (H1 2014: £4.41 million), representing 52% of total revenue. Gross margin was maintained at a robust 85% (H1 2014: 87%) and the order book remained strong, increasing to £2.84m (H1: £2.47m). After the payment of £1.80m in respect of acquired businesses, the net cash balance was £3.95m (2014: £5.07m). DPS increased by 12.5% to 0.9p per share (H1 2014: 0.8p per share), which is well covered by diluted EPS of 1.5p (H1 FY14: 1.3p). In addition, Sanderson achieved an improved intake of sales orders in the period of £4.94m, compared with £4.27m. Thirteen new customers were won (H1 2014: twelve).

Financial forecasts

To reflect a better than expected performance from Proteus on a revenue basis, we have increased our revenue forecast for FY15 to £19.00m (from £18.80m). However, maintaining gross margins at 84%, we estimate an unchanged gross profit figure of £15.98m. We continue to forecast an adjusted EBIT of £3.35m and adjusted PBT of £3.10m. We are anticipating DPS of 1.90p. For FY16, we are forecasting an unchanged revenue figure of £20.50m and gross profit of £17.43m. We are now estimating an adjusted EBIT of £3.55m (previously £3.71m) and adjusted PBT of £3.30m (previously £3.40m). We anticipate an unchanged DPS figure of 2.0p.

Valuation

Assuming Sanderson trades on a similar EV/EBITDA as its peers of 12x, we have a target price of 91p.