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Sanderson Group Plc - Company Update

Written by Helaine Kang

Company Update

IMPROVED MOMENTUM FOLLOWING POSITIVE INTERIM RESULTS

We had a management meeting with Sanderson after their successful round of investor updates post their 1H 2018 results. The group’s trading results were slightly better than management’s expectations, with both revenue and adj. operating profit increasing 34% YoY. On a like-for-like basis, excluding the Anisa acquisition, the top-line grew 3.6% (after adjusting for a small exceptional item in 2017) and operating profit by 12%, thanks to improved efficiency and cost of delivery. The management has a good level of confidence in making further progress for the remainder of FY2018, supported by a stronger and a more balanced order book and growing sales prospects. The total order book stood at £8.6mln with organic growth of 16%, largely driven by the Digital Retail division. Aside from consistently strong demand from existing customers for the mobile/omni-channel solutions, the company has secured a high-quality global luxury brand for a multi-year contract to deliver a digital store transformation. Within the Enterprise division, the flattish performance of the Wholesale Distribution business was offset by an improved performance by the Manufacturing business. Anisa has integrated well into the group, further enhancing Sanderson’s solutions and services.

RESILIENT BUSINESS WITH A CLEAR STRATEGY AND SHAREHOLDER POLICY

Sanderson has again demonstrated the resilience and good earnings visibility of the business. During 1H 2018, the gross margin was sustained at 80% and the recurring revenue contributed to 56% of the total revenue, up from 50% in 2017, underpinned by growing subscription, cloud and managed services revenues. The financial performance of the company has been consistent for the past decade. The company’s focus on cash management has led to a consistently high cash conversion ratio: 102% as of 1H 2018 and it has been over 100% since 2014. The company has delivered a progressive dividend since 2009 with an 8-year CAGR of 27% until 2017. During 1H 2018, the group increased the interim dividend by 14% and we believe that dividend growth above 10% for the next 5 years is highly achievable, supported by progressively developing trading and assuming there’s no significant deterioration of the macro economy as seen in 2008.

POSITIVE LONG-TERM OUTLOOK

The group’s growth strategy is a combination of organic growth via continued product development and selective acquisitions. The company plans to continue investing across the business with a key emphasis on mobile and e-commerce solutions to capitalise on digital transformation trends in retail, wholesale distribution and logistics. While the ongoing Brexit negotiations could lead to some uncertainty, the management is not overly concerned given the positive feedback from Sanderson customers and the healthy order book and balance sheet. We maintain our earnings estimates, currently not incorporating the company’s updated three-year plan. However, integrating longer-term financial targets, the fair value per share derived by DCF and DDM valuation implies 10-20% upside from the current share price in our view.

 

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