In-line With Expectation Profits

Sanderson Group has announced its results for the 12-months ended 30th September 2016. Revenue came-in better than our expectations, increasing by 11% to £21.32m (2015: £19.18m), although adjusted operating profit was in-line with our expectations, increasing by 12% to £3.69m (2015: £3.30m). Another key highlight was a better than expected dividend payment of 2.4p (forecast of 2.3p), up by 14% on a year earlier. The board remains confident that the company will make further progress and deliver trading results which are at least in-line with market expectations for FY17. Accordingly, we have upgraded our FY17 forecasts and issued forecasts for FY18. 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 4.11%.

Full-Year Results

Recurring revenue from pre-contractual licence and ongoing support services grew by 10% to £10.75m (2015: £9.77m), representing 50% of total revenue. Sales order intake increased by in excess of 20% to £12.26m (2015: £10.03m), 31% of which was gained from new customers, representing almost twice the level of the prior year. Gross margin remains strong at 84% (2015: 85%), reflecting continued focus on supplying its own proprietary products and services. Gross margins from recurring revenues covered 63% of total group overheads in FY16. Profit before tax increased by 37% to £2.78 million (2015: £2.03m). Group order book grew by in excess of 25% to £3.02 million (2015: £2.35m). Including the deferred payment in respect to businesses acquired in 2013 and 2014 (£1.66m) and the payment of dividends (£1.21m), cash balance as at period end was £4.34m (2015: £4.61m).

Financial forecasts

For FY17, we are forecasting revenue of £22.10m. We are assuming gross margins of 84.2%, leading to a gross profit forecast of £18.61m. We expect the group to continue its investment in product innovation, as well as sales & marketing, and are forecasting an adjusted EBIT of £3.89m. We are also forecasting a DPS of 2.60p. For FY18, we are forecasting revenue of £23.30m, gross profit of £19.62m and adjusted EBIT of £4.20m. We anticipate DPS of 2.9p.

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.