• Mark Watson-Mitchell

SysGroup – on just 7.16 times earnings and trading at 44% of a broker’s valuation

Ok now pay attention.


Forget about the way the FTSE100 Index has been gyrating recently.


Don’t get too concerned about the way that the Unions are looking to create public inconvenience.


Worry not about rising prices, we will soon learn to live with such irritations, although the media seems to love casting horror story after horror story.


Markets go up and they come down, so too do share prices, especially those of the companies that have been so hyped up of late, they just seem recently to have been in a downward drift.


So why am I so bushy-tailed?


Ready for an upwards climb


Do you want to know what little stock I reckon will soon be in for a cracking run?


Capitalised at just under £13m, the SysGroup (LON:SYS) is an award-winning managed IT services, cyber security, expert IT consultancy and cloud hosting provider in the UK.


The group has offices in Liverpool, London, Bristol, Edinburgh, Manchester and Newport.

It operates through two main segments, Managed IT Services (87% of group revenues) and Value-Added Resale (13% of sales).


It offers cloud-based public, private, and hybrid hosting services, as well as virtual private cloud, PCI-DSS hosting, cloud desktop, and SysCloud services.


Other services include managed IT services comprising managed cloud, managed infrastructure, managed IT support, managed IT security, managed office 365, managed AWS, and managed azure.


It provides disaster recovery and back up services, as well as IT security services, such as penetration testing, endpoint security, DDOS, email security, security awareness training, firewalls, multi factor authentication, and GDPR automation services.


The company also provides connectivity solutions, and IT consultancy services; and sells IT hardware, licenses, and warranties from supplier partners.


It serves charity, education, financial, government, healthcare, legal, leisure, manufacturing, retail, and tech industries.


The Group’s Selling Tag


It really could not be clearer – the group describes its mission to its customers as


“We focus on your business, providing solutions built from the best-in-class technologies offered by experts to help you grow in a dynamic, technological world.”


The Group’s Clients


Despite its tiny size the group already has an impressive client list, including some top names, such as – AEG, FiloFax, MoneyWeek, the VSO, AXA, Catapult, The Duke of Edinburgh’s Award, Admiral, Mulberry, PWC, Science Museum Group, Hill & Smith, The Welsh Rugby Union, Garden Site, the University of Northampton, CMO Stores, the Royal Albert Hall, Holiday Inn, Servomex, Confused.com, the IOD, the Bradfords Group, hmv.com, ScrewFix, Adelante, itgroup, Sega, homebargains, RCPCH, SilverDoor, Hill Dickinson, sequel, and Beesley & Fildes amongst so many others.


The Group’s Partners


The company operates with and through various partners, including with Dell, WatchGuard, Microsoft, Veeam, HP, Nimble Storage, Cisco, Kemp Technologies, Meraki, Fortinet, Mitel, NetApp, RIPE NCC, Mimecast, VMware and Zerto.


Accretive acquisitions ahead


Chaired by the magic Michael Edelson, the company was formed in 2007 and was formerly known as Daily Internet. It floated on the AIM market in 2013 and changed its name to SysGroup in July 2016.


Over the last few years, the group has made a handful of strategic acquisitions and the ‘buy and build’ process is expected to continue – offering massive cross-selling opportunities as this tiny organisation expands both in size and in its service offerings.


Michael Edelson commented that


To support the Group's ambitious growth strategy, the Board continues to monitor the market for complementary acquisitions, backed by the strong bank support with increased credit facility and a solid shareholder register all supportive of the M&A strategy.”


The Equity


There are some 48.86m shares in issue.


Larger professional holders include Gresham House Asset Management (28.65%), Canaccord Genuity Wealth (18.42%), Herald Investment Management (7.05%), Helium Rising Stars Fund (6.96%), Downing Ventures (6.17%) and Praetura Group (3.50%).

Named private holders include Darren Carter (7.27%), Non-Executive Director Michael Fletcher (3.50%), The Fragrance Shop founder William Currie (2.78%) and Michael Edelson (1.76%).


Recent results and the ‘green shoots of recovery’


On Monday of this week the group declared its results for the year to end March 2022.

Last year it endured some corporate rationalisation at the same time as its revenues were impacted by the Covid-19 hassles.


They showed revenues down 19% at £14.75m (£18.13m), however its adjusted pre-tax profits were just 2% lower at £2.04m (£2.09m), the earnings came out at 3.6p against 3.5p per share previously.


The net cash at the year-end was 59% higher at £2.99m (£1.88m).


Adam Binks, the group’s CEO, stated that:


"The Adjusted EBITDA performance and strong cash generation in a year when turnover was impacted by COVID highlights the strength of our business model. We have invested to drive future growth whilst maintaining prudent financial discipline throughout the business.


Operationally, the Group is ideally placed to take advantage of conditions as they begin to normalise and we have started to see the early green shoots of such a recovery.”


He went on to note that two recent acquisitions


“added further customers, expertise and geographical reach and demonstrate our ongoing commitment to be consolidators in this highly fragmented market. M&A activity in our sector is picking up and we believe there will be further opportunities that we can take advantage of during the course of this year.


With a clear strategy for both organic and inorganic growth, the Board is confident in the future."


Broker’s View


Analyst Bob Liao, at the group’s recently appointed NOMAD and broker Zeus Capital, has estimates out for the current year of £20.5m in revenues, £2.4m profits and 3.7p earnings per share.


Furthermore, he has compared the group’s growth opportunities and its cash generation with its peer group. In so doing he has put out an estimated valuation of 60.1p per share.

In the longer term he sees it generating up to a £50m revenue target, with a 30% EBITDA margin, which could give it a £100m enterprise value.


My View


One item I have kept until late in this Profile is the fact that the group lifted its annual recurring revenue for its last year by some 8% to 87% - I love it!


This little company offers some massive upside to patient investors – already its

shares are cheaply offered in the market at just 26.5p, showing just 7.03 times current year price-to-earnings – that is far too low a rating and is also why I am confident of today’s Profile feature.


The current price is just 44% of the Zeus Capital value of the group’s shares.


My Target Price is a very easy 34p and could well be scored within months. In fact, I see them rising a great deal higher than that price objective, possibly before the year Is out.


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This profile is yet another in my series of covering companies that have increasing annual recurring revenues (ARR). Annual recurring revenue is a simple and beautiful metric because it is easy to und