Interims in line with expectations

Sanderson Group has announced its interim results for the period ended 31st March 2016. The results are in line with expectations, with revenue and operating profit increasing by 8% and 7%, respectively. The software and IT services company stated that it is confident in making further progress and delivering trading results for the full-year (ended 30th September 2016) in line with market expectations. Accordingly, we reiterate our forecasts for the full year and continue to classify the shares as a hybrid growth and income stock, with the shares providing exposure to both the high-growth enterprise resource planning software market and a decent dividend yield of 3.1%.

Trading update

Revenue increased by 8% to £9.86 million (2015: £9.09 million) as both the digital retail and enterprise divisions performed well (the respective revenue growth for the two divisions is 5% and 10%). Gross margin increased by 1 percentage point to 86% (2015: 85%), driven by increased sales of its proprietary offerings. Recurring revenue increased by 9% to £5.19 million (2015: £4.76 million), representing around 53% of total revenue in the period. Operating profit increased by 7% to £1.47 million (2015: £1.37 million) despite the continued investment in both products and services development and sales and marketing. Mainly reflecting deferred consideration payments in relation to acquired businesses (£1.54 million) and the dividend payment (£657k), net cash reduced by 14% to £3.39 million (2015: £3.95 million). A significant portion of profit continues to be converted into cash. The interim dividend was increased by 11% to 1p per share (2015: 0.90p per share). Going forward, a particular focus will continue to be placed on further developing mobile and ecommerce offerings in digital retail as well as further strengthening its offerings within the food and drink processing space.

Financial forecasts

For FY16, we continue to forecast revenue of £20.50m, gross profit of £17.43m, adjusted EBIT of £3.69m and an adjusted PBT of £3.46m. We are forecasting a DPS of 2.30p. For FY17, we are forecasting revenue of £21.50m, gross profit of £18.28m, adjusted EBIT of £3.96m and adjusted PBT of £3.81m. We also anticipate FY17 a DPS of 2.5p.

Valuation

The shares are trading at a 21% discount to the Software & IT services sector on an EV/EBITDA basis (12.2x vs 15.4x). A key risk includes a deterioration in the economic environment.