Sanderson Group

BUY

30/11/2010

In line with a bullish trading update issued earlier in the month, software-to-IT services concern Sanderson has issued a solid set of figures. Improving market conditions helped sales increase 8% to £27m in the year to September and even more impressively, AIM-listed Sanderson swung into the black with a £506,000 profit (2009: £2m loss).

Total order intake is also up an impressive 22% to £15.6m which bodes well for the future. Strong cash flow has allowed Sanderson to pay its debt down ahead of schedule with net debt slashed from £10m to £7.8m – this should fall to nearer £6.4m in the current financial year (well within its current £9m bank facilities). This was achieved despite a 50% hike in the dividend to 0.6p-a-share. Gross margins slipped by 3 points to 69% due to a change in the sales mix but Sanderson is keen to point out that recurring revenues make up half of the total.

The retail arm still makes up three quarters of the group and here Sanderson has over 600 customers and has picked up new clients such as Hamleys, Fenwicks and Links of London. Smaller clients are also starting to spend again and the need to harness sales through the internet is proving a massive driver of new business.

Sanderson's manufacturing arm is focused on the provision of IT solutions to clients in areas such as engineering, plastics and food processing. Sales remained relatively flat at £5.8m, however it enjoys a huge slug of recurring revenue with this element accounting for 61% of sales. The printing and aerospace markets are proving to be its main areas of growth.

Recent product suites such as in business assurance and factory automation are proving fruitful and Sanderson has also just launched a range of energy saving products branded as ‘Green IT’. New initiatives in areas such as Software-as-a-Service (Saa) will be launched in the next quarter.

For 2011, house broker Charles Stanley expects normalised pre-tax profits to rise to £2.5m with EPS at 5p. Following a recent rally, the shares have slipped back to 26.5p on profit taking but on just below six times next year's earnings and with a reasonable yield to boot, we retain our buy recommendation.