AGM Supports Growth Prospects

Reporting at its Annual General Meeting, Sanderson Group announced that it has made a solid start to the current financial year ending 30th September 2017, with sales order intake in the first four months of the year increasing by 8% on the comparable period a year earlier. The software and IT services group which specialises in multi-channel retail and manufacturing markets added that it remains confident that it will make continued progress in the current financial year. The announcement is in-line with our expectations, and we keep our forecasts unchanged. With the shares offering investors exposure to the high-growth Enterprise Resource Planning software market, as well as offering a decent dividend of 3.6%, we continue to classify the shares as a hybrid growth and income stock.

Annual General Meeting

Order book continued to grow and is ahead of the level as at the end of January 2016. Its digital retail businesses have experienced a strong increase in sales order intake. Its enterprise businesses have also made a good start to the current financial year, in particular by those businesses whose activities are focused in the wholesale distribution, logistics and fulfilment sectors.

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

We continue to be impressed by the high level of recurring revenues, which cover two-thirds of business overheads. A strong and growing range of products and services, a growing presence in the multi-channel retail and manufacturing markets, the strengthened balance sheet and strong cash generation augur well for Sanderson. The shares are trading at a 39% discount to the Software & IT services sector on an EV/EBITDA basis (9.28x vs 15.3x) (source: Stockopedia). A key risk includes a deterioration in the economic environment.