Sygnity - Moving on From Legal Feud But Revenue Outlook Weak
Shares in Sygnity have rallied >54% since our last update in September 2020. In February 2021, the Company finally reached a settlement with its former subcontractor, Fast Enterprises (“Fast”), and by ending the long-standing dispute it addressed the last of the missteps taken during the challenging period of 2014-17. Sygnity’s financial standing improved considerably over the past year, and by the end of the current fiscal year of FY2020/21, ending 31 September 2021, we expect the Company to have brought its net debt/EBITDA ratio to 0.6x. Sygnity also currently achieves high FCFE in the range of PLN 26-27m, with potential to offer high yield of 10%. On the downside, earnings in Q1 FY2020/21 came in soft, accompanied by a muted outlook for the quarters ahead, underpinned by a thinner order book than reported around this time last year. In October 2020, Sygnity signed two large framework agreements that might give rise to additional revenues in the coming year, however a repeat of last year’s results is unlikely in our view. Under these circumstances, we see FY2020/21 IFRS 16 EBITDA as ending up 5.8% lower than a year ago. Shares in Sygnity are still trading at attractive multiples of 5.9x FY20/21 EV/EBITDA and 9.1x P/E (adjusted), but we do not see upside catalysts until the Company can demonstrate growth in profits. After updating models to reflect the positive effect of the Fast settlement on net debt, on the one hand, and after downward revisions to earnings expectations on the other hand, we downgrade SGN from buy to hold with a new target price of PLN 11.60.
Co. is engaged in providing information technology (IT) services to corporate and institutional clients primarily in five sectors of the economy: banking and finance, industry, public, telecommunications, and health care. Co. offers production and implementation of software; IT enterprise consulting services; building and integration of local and wide area networks (LAN, WAN); delivery and installation of hardware; software, network and hardware maintenance services; and training services. Co. has also enhances its traditional offer by four business models: implementation of package products and services concerning e-business; IT outsourcing - managing client's IT resources; ASP (Application Service Provision) - making software available to clients via the Internet; and webhosting - leasing servers for running e-business activity, as well as for worldwide web services.
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