Trading Update

Sanderson Group has announced a trading update for the 12-month period ended 30th Sept. 2017. Key highlights include a better than expected cash balance of over £6.0m (vs. GECR forecast of £5.2m), in-line with expectation adjusted operating profit of £3.9m and slightly below expectation revenue of £21.5m (vs. GECR forecast of £22.1m). The software and IT services group added that it’s well positioned to make further progress during the current financial year (FY18). Accordingly, we update our forecasts for both FY17 and FY18. We will issue forecasts for FY19 on the back of the full-year results announcement, which is scheduled for release on 28th Nov. 2017. 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 and a decent prospective dividend yield of 4.17%.

Trading Update

Revenue increased by 1% to £21.5m (FY16: £21.3m), gross margin decreased by 2pp to 82% (FY16: 84%), and adjusted operating profit increased by 6% to £3.9m (FY16: £3.7m). The amount of non-recurring items was £0.5m, and these mainly relate to due-diligence costs in regards to a potential acquisition, the consolidation of office premises with internal reorganisation and recruitment of a new group finance director. Pre-contracted recurring revenues were almost unchanged at £11m (FY16: £10.8m), which represents more than half of total revenue. Sales order intake increased by 12% to £13.7m. Order book increased by 92% to £5.8m (FY16: £3.02m. Reflecting the group’s strong cash generation, cash increased by at least 38% to over £6m (30th Sept. 2016: £4.34m). The company said that its Digital Retail Division achieved double digit growth, and that sales prospects remain good. Similarly, it said that the Enterprise Division achieved another solid year’s performance and that sales prospects remain good.

Financial forecasts

For FY17, we reduce our revenue forecast to £21.5m, our gross margin forecast to 82% (from 84.2%) and operating cost forecast to £14.3m (from £14.8m) and increase our exceptional cost to £0.5m (from £0.1m), resulting in an unchanged adjusted EBIT forecast of £3.89m. We maintain our DPS forecast of 2.60p. For FY18, we now forecast revenue of £23.0m (from £23.3m) and gross profit of £18.86m (from £19.6m). We maintain our adjusted EBIT forecast at £4.2m and DPS forecast at 2.9p. A key risk to our forecasts includes a deterioration in the economic environment.

Valuation

The shares trade at a 61% discount to its peers on an EV/EBITDA basis (6.7x vs 17.1x), according to Bloomberg.