Chairman's Statement

SCISYS ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

 

Chairman’s Statement

 

Earlier Optimism Justified

In my report for 2016, I advised that, given the strength of our then current order book and short-term pipeline, we anticipated that the growth we were seeing would continue into at least the first half of 2017. We also noted that, in keeping with the pattern over previous years, we anticipated that our second half-year financial performance in 2017 would be substantially stronger than the first half.

This was, indeed, the case and I am pleased to report that our optimism and guidance was well placed. The Group delivered a strong overall performance in 2017, with results for full-year revenues and adjusted profits being comfortably in line with guidance. It is also pleasing to report a positive advance on net margins, which is in line with our strategic objectives.

Going into 2018 the outlook continues to be very encouraging.

The positive news flow across the year on new business wins was crowned by the announcement in late October of the award of a €18m contract with OHB System AG to deliver the ground station control and communications infrastructure for Heinrich Hertz, the German national satellite-communications mission. Further contract wins across the Group in the last quarter of 2017 also meant that we entered 2018 with a record order book of £91.3m.

Operational cash flows were very healthy across the year, resulting in further reductions in net debt and underpinning a healthy 10% uplift in the recommended final dividend payment. With the acquisition of the ANNOVA Systems GmbH (“Annova”) business our income streams (which are predominantly in £ sterling and €) are well balanced, providing an internal hedge against exchange-rate movements. We do not anticipate any major impact on profitability in 2018 from currency fluctuations or hedging adjustments.

Further detail on the performance of each division is given below. However, it is worth noting the overall healthy organic growth and impressive contract wins that contributed to our strong operating cash flows. Our Space division in particular deserves a specific mention for its extraordinary achievement, with 18% year-on-year growth in revenues and a 17% growth in contribution.

Of strategic note is the performance of our Annova division. A primary focus going into 2017 was the integration of Annova into the Group. We have started a programme to align Annova’s internal processes with SCISYS’ high standards. Solid, on-going progress can be reported here. Its performance is closely aligned with the Group’s expectations at the time of acquisition. Delivery of a key milestone on Annova’s BBC newsroom contract was achieved in late summer, with the system now on air in the West Midlands and in Salford. Significant contract wins with MDR, ARD’s national news programme in Germany and Corus in Canada have strengthened its geographic footprint. Synergies with our Media & Broadcast (M&B) division resulted in a major new win for M&B with RTL in France, where our dira! system is already on air.

In addition to winning the Heinrich Hertz project, our Space division has extended its footprint in the Galileo project while our Enterprise Solutions and Defence (ESD) division has seen key wins late in the year with Public Health England, and the Forestry Commission, as well as new work with a major defence prime contractor.

The strength of the order book within both our Space and ESD divisions is resulting in a significant expansion of their teams – with an associated recruitment drive. Similar growth has resulted in the Group opening a new office in Dortmund to house our M&B division.

Strategically we are well positioned and confident in our ability to deliver further progress in 2018.

Contingency planning is in hand to protect the Group from any potential adverse operational consequences resulting from the negotiations between the UK and the EU, in respect of the UK’s withdrawal from the EU. We believe that SCISYS is well positioned in the short to medium term and that our ESD division might even gain from the situation. Any impact is likely to be felt by our Space division, albeit that the division has continued to win contracts in this current period of pre-Brexit uncertainty which extend beyond the proposed Brexit date, which is encouraging.

The Board continues to explore a wide range of Brexit options. While we very much welcome the UK government’s strong support for the UK’s continued participation in EU-funded space programmes (EGNOS, Galileo & Copernicus) and hope to see further clarity on this position during the negotiations for the transition-stage arrangements, we are nevertheless preparing a range of tactical options (including the option of re-domiciling, while retaining our AIM listing and associated UK tax benefits) to mitigate the possible effects of Brexit on our Space business post-March 2019 should negotiations not prove favourable.

Key financials reflect the success

In the year ended 31 December 2017, SCISYS posted overall revenues of £57.2m, which were up 25% on last year (2016: £45.7m). Within this figure, professional fees were 28% higher at £48.0m (2016: £37.6m). The Group delivered an adjusted operating profit of £4.6m (2016: £3.2m), a 44% uplift on 2016. The operating profit was £4.7m (2016: £2.8m). A reconciliation between the adjusted and statutory operating profit measures appears in the Finance Director’s Report. Adjusted basic earnings per share were 10.0p (2016: 9.2p); basic earnings per share were 11.5p (2016: 7.6p). Cash generation remained healthy and this resulted in a net inflow of £4.5m (2016: £2.1m). The Group’s net-debt position was £5.9m at year‘s end (2016: £10.2m). At 8% (2016: 7%), our adjusted operating margin has improved. The year-end order book was at a record level at £91.3m (2016: £64.6m).

     

Our people are the key to our success

As always, our thanks rightly go to all of our staff within the divisions, who actively implement our corporate core values of trust, respect and openness, combined with prudence and balanced growth. Their hard work and ability to deliver the business solutions that our customers need, within tight budgets and timescales, is the key factor to the on-going relationships that SCISYS enjoys with its many and varied long-standing customers. Our thanks also go to all of our staff within the Group’s central functions, who provide essential services and valued support to the Group and who have made an important contribution to these results.

 

Dividend

An interim dividend of 0.59p per share was paid on 9 November 2017. The Directors are now proposing a final dividend of 1.57p per share, subject to approval by shareholders at the Annual General Meeting on 28 June 2018. The proposed final dividend will be paid on 27 July 2018 to shareholders on the register at 6 July 2018. The shares will go ex-dividend on 5 July 2018. This would make the dividend for the full year to 31 December 2017 2.16p per share (2016: 1.96p) and maintains our stated strategy of progressive dividend growth.

 

Governance matching our needs

We are committed to high standards of corporate governance. We have strong governance frameworks in place throughout the Group in balance with our risks. SCISYS is currently compliant to the extent appropriate for a company of its size with the UK Corporate Governance Code, and is looking to adopt the QCA Corporate Governance Code during the course of 2018.

 

LOOKING TO THE FUTURE

The key elements of the Group’s strategy remain unchanged. We continue to focus on balanced revenue growth and margin improvement, as well as management/control of risk and succession planning.

 

Outlook

We are pleased with the healthy organic growth in revenues achieved in 2017. Our strong second-half trading performance, combined with steadily reducing levels of net debt and a record year-end order book provides a solid platform to deliver further progress in 2018 and beyond.

Based on current performance on projects and our order pipeline across the entire Group, the Directors remain fully confident in the prospects of the Group’s future organic growth. We will also continue to look for opportunity, where there is a good market, product and cultural fit, to grow through acquisition. l

 

Dr. Mike Love

Chairman