Full-Year Results Point to A Positive Outlook

Sanderson Group has announced its results for the 12 months ended 30th September 2017. Key highlights include revenue growth of 1.1%, adjusted operating profit growth of 5.7% and better than expected net cash of £6.18 million. The software and IT services business added that it is well positioned in its target markets, and that it has a good level of confidence that it will make further progress and deliver trading results that are, at least, in-line with market expectations for FY18. With the results in-line with our expectations, we maintain our forecasts for FY18. We also introduce forecasts for FY19, and 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 4.16%.

Full-Year Results

Revenue increased by 1.1% to £21.56 million (FY16: £21.32 million), and pre-contracted recurring revenue increased by 4% to £11.18 million (FY16: £10.75 million), representing 52% of total revenue (FY16: 50%). Sales order intake grew by 12% to £13.69 million (FY16: £12.26 million), reflecting the continual investment in sales and marketing. The order book at period end was £5.79 million (FY16: £3.02 million) and that includes a significant new order from an existing customer, which is scheduled for delivery over the course of the next two financial years. Gross margin reduced by 2pp to 82% (FY16: 84%), and, impressively, the gross margin from recurring revenues covered 67% of total group overheads in the financial year, up from 63% a year earlier. Adjusted operating profit increased by 5.7% to £3.9 million (FY16: £3.69 million). Non-recurring items totalled £0.49 million, and they relate to potential acquisitions, the consolidation of office premises with internal reorganisation and changing of CFO. Final dividend increased by 11% to 1.55p (FY16: 1.4p), leading to a total dividend for the year of 2.65p (FY16: 2.4p), which is well covered by basic adjusted EPS of 6.4p (FY16: 5.6p).

Financial forecasts

For FY18, we continue to forecast adjusted EBITDA of £6.1m on revenue of £30.4m. We maintain our DPS forecast of 2.9p. For FY19, we forecast adjusted EBITDA of £6.6m on revenue of £33.2m. We anticipate DPS of 3.20p. 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.