Investing in microcaps can be an all or nothing experience. Either they invent the next best thing and their shares go to the moon, or they crash. Not so with IT outfit SciSys. Unlike some of its peers, it generates solid and predictable returns.
So, even in challenging conditions, the board expect profits will jump 20% this year. This is due to its niche technology and terrific client retention rate 74% of revenues are derived from customers who have been on the books for more than five years.
SciSys's expertise lies in developing bespoke solutions for the space, media, military and environmental sectors. It recently delivered its one-thousandth digital transmitter as part of Britain's switch over to digital TV. In 2011, it also won coveted deals with Lockheed Martin, the Met Office and the European Space Agency.
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What's more, with the exception of its environmental division, which is being hurt by government cutbacks, all of its business units are enjoying healthy growth. The media arm has been boosted by a £15m BBC contract. Meanwhile, the defence unit continues to sign up new work. As for its work in space, after completing the Galileo satellite navigation system, the division has secured big follow-on contracts to take Galileo to full operational capability.
SciSys (Aim: SSY)
All told, the December order book closed at £26.7m, underpinning house broker Canaccord's estimates for 2012 turnover and earnings per share of £43m and 7.16p, rising to £44.3m and 8.2p in 2013. The chief executive, David Jones, said 2011 had been another strong year with operating margins nudging up to 6%. These should be moving up towards the group's 7% target by the end of 2013.
On this basis I value the stock on an eight times EBITA multiple. With zero net debt, that produces an intrinsic worth of 75p a share.
There are a few risks. The British government's austerity measures could put a brake on performance. However, 55% of profits are earned overseas in Germany so the impact should be contained. SciSys is exposed to the usual risks surrounding small IT contractors and could be hit if the economy takes another dive or the euro currency declines significantly. Finally, the shares tend to be thinly traded, so if you do decide to buy, beware of inadvertently bidding up the price.
Rating: SPECULATIVE BUY at 51p (market cap £15m)
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