Interims In Line With Expectation

Sanderson Group has announced its interim results for the period ended 31st March 2016. The results are in line with expectations, with revenue and adjusted operating profit increasing by 11% and 5%, 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 2017) 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 3.7%. 

Interims

Revenue increased to £10.90 million (H1 FY16: £9.86 million), and adjusted operating profit (stated before amortisation of acquisition-related intangibles, share-based payment charges and acquisition-related costs) increased by 5% to £1.55 million (H1 FY16: £1.47 million). Gross margin decreased by 4 percentage points to 82% (H1 FY16: 86%), reflecting an increase in sales of its non-proprietary offerings. Recurring revenues increased by 4.0% to £5.40 million (H1 FY16: £5.19 million), representing 50% of total revenue. Periodend order book was £2.78 million (H1 FY16: £3.20 million). Sales order intake decreased slightly to £5.81 million (FY16: £6.02 million), but remained at a high level. Net cash increased by 33% to £4.51 million (H1 FY16: £3.39 million). Dividend increased by 10% to 1.1p per share (H1 FY16: 1.0p). CFO Adrian Frost will be leaving the company later in the year. After speaking with Mr. Frost, we note that the move is for personal reasons. 

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.