Progressing as expected

Sanderson Group has announced a trading update, covering the six months ended 31st March 2017. Results are in-line with management expectations, with revenue increasing by 10.5% to £10.90m (H1 2016: £9.86m) and operating profit (before amortisation of acquisition-related intangibles, share-based payment charges and acquisition-related costs) increasing by 5.4% to £1.55m (H1 2016: £1.47m). The software and IT services group said it is confident of making further progress during the remainder of FY17. We keep our forecasts pretty much unchanged, albeit adjusting our tax payments slightly after speaking with management. 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 offering a decent prospective dividend yield of 3.4%.

Trading Update

Pre-contracted recurring revenue increased by 4.0% to £5.40m (H1 2016: £5.19m). Operating expenses increased by £0.55m as the company continued to invest in particular in the digital retail market. As at 31st March 2017, order book stood at £2.78m, which is slightly lower than six-months earlier (£3.02m as at 30th September 2016), mainly reflecting the investment in implementation and delivery capability. Net cash as at 31st March 2017 was £4.51m, which is 34% higher than a year earlier, reflecting continuing strong cash generation. With regard to the digital retail division, revenue grew by 20% on a year earlier, and sales orders increased by c.50%. The company said that the enterprise division has continued to make progress and enters H2 with good order book and sales prospects. Interim results are scheduled for release on 24th May 2017.

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, a growing range of offerings, and strong balance sheet and cash generation. 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.