SysGroup plc (LON:SYS) is an award-winning provider of managed IT services, cyber security, cloud hosting and IT consultancy. The Group offers investors an attractive business model with high recurring revenue and a diversified customer base. SysGroup is competitively well positioned to benefit from sector trends and is investing in sales capacity to take advantage of cross-selling opportunities and a recovering market. In addition, the company has opportunities to make highly accretive acquisitions and its shares trade at depressed multiples that we believe do not reflect the company’s strong fundamentals.
¨ Financials: In the year to 31 March 2022 revenue declined 18.7% to £14.7m due to customers temporarily delaying IT refresh programs and scaling back contract sizes through the pandemic. However, most of this impacted lower margin Value Added Resale revenues rather than core Managed IT Services revenue, leading to only a 15.1% decline in gross profit to £8.9m. Managed IT Services revenue declined 10.5% to £12.8m and earned a 66.3% gross margin, whilst Value Added Resale (VAR) revenue declined 49.8% to £1.9m, at a 21.5% gross margin. Good cost control and the realisation of headcount synergies from prior acquisitions meant that adj. EBITDA decreased by only 3.4% to £2.8m and adj. PBT decreased 2.4% to £2.0m. Strong cash conversion (88% of adj. EBITDA to adj. CFO) led net cash (excl. leases) to grow to £3.3m at 31 March 2022.
¨ High revenue reliability: SysGroup has high revenue visibility (87.1% recurring revenue in FY22, supported mostly by contracts with a typical 36 month life at inception) and high cash conversion (88% in FY22). In addition, SysGroup has diverse industry exposure (largest sector is only 10% of revenue) and low customer concentration (c. 6% in FY22, with a target of <5% going forward).
¨ Forecasts: We forecast a 39.0% increase in revenue to £20.5m in FY23, driven by the post-Covid recovery in SysGroup’s existing business and two acquisitions made in April 2022. A structural shift in revenue mix (due to acquisitions and the recovery in VAR) means we expect gross margin to decrease to 55.0%, with absolute gross profit increasing 26.5%. Adj. EBITDA increases 18.9% to £3.3m in FY23 in our forecasts, accounting for some cost inflation and strategic hires. We expect FY23 closing net debt to be £3.1m (ex. leases), reflecting M&A outflows and conservatively recognising £3.1m of contingent consideration as debt. We expect this net debt balance to quickly reduce as SysGroup achieves 80-90% EBITDA to cash conversion with minimal required capex, notwithstanding further M&A. The high cash generation and banking facilities provide the firepower for future acquisitions that are not explicitly included in Zeus forecasts, but provide upside earnings potential.
¨ Undervalued: Shares trade at 4.8x FY23 EV / EBITDA compared to a peer average of 7.3x, which is not reflective of the Group’s attractive growth opportunities or cash generation, in our view. The average of our valuation estimates (peer mean EV/EBITDA, DCF, regression analysis) gives an estimate of 60.1p per share, or 126.8% upside to today’s price. In the long term, we believe the company could reach £50m in revenue and 30% EBITDA margins, with the scale provided by acquisitions and organic growth. Valuing this long-term potential EBITDA (£15m) at sector mean multiples (7.3x) indicates an enterprise value in excess of £100m.
Summary financials
| Price | 26.5p |
| Market Cap | £13.1m |
| Shares in issue | 49.4m |
| 12m Trading Range | 23.5p– 47.0p |
| Free float | 62.70% |
| Next Event | Interim results – November |
Financial forecasts
| Yr end Mar (£’m) | 2021A | 2022A | 2023E |
| Revenue | 18.1 | 14.7 | 20.5 |
| yoy growth (%) | -7 | -18.7 | 39 |
| Adj. EBITDA^ | 2.9 | 2.8 | 3.3 |
| Adj. EBIT^^ | 2.2 | 2.2 | 2.6 |
| Adj. PBT^^ | 2.1 | 2 | 2.4 |
| Adj. dil. EPS (p)^^ | 3.4 | 3.4 | 3.7 |
| Net cash/(debt)^^^ | 2.3 | 3.3 | -3.1 |
| P/E (x) | 7.9 | 7.9 | 7.2 |
| EV/EBITDA (x) | 3.7 | 3.5 | 4.8 |
Source: Audited Accounts and Zeus estimates
^ Adjusted for exceptional items and share-based payments
^^ Adjusted for exceptional items, share-based payments, and amortisation of intangibles
^^^ Excludes IFRS 16 lease liabilities, includes contingent consideration
