Synectics LON:SNX, the Sheffield-based, AIM-listed security and surveillance company published a trading update this morning (11th December).
The Armchair Trader added Synectics to its venture portfolio in April this year, and although we noted that the tech company was small and high risk, we believed that it was undervalued given its strong financials.
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We said: “We think this is an undervalued company with a PE ratio that is still at 13x approx but which sports some spectacular income metrics. We’d be looking to see the market wake up to its cash flow this year. It shapes up very well against peers in the sector as well.”
Synectics shares opened the week at 124p after closing last week at 105p an 18% increase over the weekend. Over one-year Synectics has returned 10.2%, but as noted the share price has been volatile, ranging from 92.4p to 141.45p over a 52-week period. Over two years the firm’s shares have moved up 15.3%. Synectics is still a small company with a market capitalisation of GBP18.7m.As reported, Synectics has undergone some corporate reorganisation this year, around this time in 2022 the company, under newly appointed CFO, Amanda Larnder, disposed of some of its’ non-core businesses, selling SSS Management Services Limited to Parfas Limited for GBP200,000. The firm published its final results to end-November 2022 in February and saw revenue grow year-on-year by 6.8% to GBP39.1m but with this saw a 140% increase in y-o-y profit to GBP1.2m and earnings per share up 365% to 6.9p with GBP4.3m cash in the bank, no debt, but agreed facilities of up to GBP3m and an order book of GBP24.4m, which all-in-all was a tidy performance in 2022.
Contract wins
Fast-forward a year on, and business wins including a GBP3.5m CCTV contract with oil giant Saudi Aramco, a USD3m surveillance contract with an Asia-based casino, and a GBP1m multi-site contract with a UK financial services firm, the company said today that it: “expects results for FY 2023 to be materially ahead of market expectations, reflecting strong trading in the second half, particularly in the oil and gas market.”
The company said it finished its financial year with an order book of GBP28.6m, an increase in net cash to GB4.6m with the GBP3m debt facility remaining undrawn.
Rob Sanders, a research analyst at broker, Shore Capital, which has Synectics under coverage was encouraged by the update. He said: “…We have flagged throughout FY23 that, in our view, Synectics will in due course benefit from a recovery in its end markets, albeit sales growth in casinos has remained relatively subdued this year. However, demand in Oil & Gas has been extremely robust and the momentum that seemed to be building in H1has continued throughout the rest of the year and is, no doubt, a significant contributory factor to the increased order book.”
Strong balance sheet
Sanders highlighted Synectics’ strong balance sheet and plenty of ammunition between the cash-on-hand and lending facility to accelerate its revenues and that the company still has the capacity to deliver up to GBP100m revenue and a double-digit EBIT margin with a target price of price of somewhere between 230p and 285p. However, he added that given the latest positive update that Shore Capital may uprate its recommendations post-results in February, especially as the casino industry recovers.
Bridgewise rates Synectics as ‘Outperform’. The AI Broker said: “At a high level, the metrics from Synectics’s 2Q23 financial report release were demonstrably positive. Their positive income, growth, and value factors indicate that it is likely to continue to produce impressive results for the foreseeable future, as well. This relative strength should allow Synectics to continue to perform well even in a tough market. Therefore, [it] earned a total score of 82 out of 100 and an ‘Outperform’ recommendation”.
Synectics engages in the design, integration, and support of security and surveillance systems in the United Kingdom and internationally. It operates through Systems and Security divisions. The Systems division provides specialist electronic surveillance systems based on its own proprietary technology for gaming, transport, critical infrastructure, public space, and oil & gas applications. The Security division provides large-scale electronic security systems to infrastructure, high security, transport, and public space applications. The company was formerly known as Quadnetics Group plc and changed its name to Synectics in July 2012. Synectics was incorporated in 1983.
