Sygnity Stock Faces Headwinds Despite New Government Contracts
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New Contracts Not Enough to Justify Multiples
Sygnity stock has retreated 13.0% in the last five months, showing 22.6ppt underperformance relative to the WIG index. At the same time, in the last three months Sygnity has secured two major government contracts from the Ministry of Family and Social Policy and the National Bank of Poland, According to our calculations, the new business will provide a 6.8% boost to sales in fiscal 2023/24.
On the downside, we currently opt to revise our FY2022/23 sales forecast downwards by 4%. Further, even though we believe Sygnity can maintain high sales margins in FY 2022/23-24/25, we are prompted to downgrade our EBITDA forecasts for the period by 6-10%.
After updating our models to include current peer multiples and a lower risk-free rate, we set our new target price for Sygnity at PLN 21.60, which implies substantial, 34% downside potential from the current level that mandates a reiterated sell recommendation. SGN is currently trading at 15.9x EV/EBITDA'24 and 25.3x P/E'24, showing respective implied premiums of 101% and 88% to the peer group that, as far as we can tell, are not justified by anything in the fundamentals.
New Contracts
Sygnity has secured two material government contracts in the last few months.
In August, the Company was awarded an assignment by the Ministry of Family and Social Policy for the development and maintenance of the ‘SyriuszStd’ software used by employment offices. Sygnity's total compensation under the contract is capped at PLN 45.7m. In July, Sygnity signed an extension to a central accounting system maintenance and development contract with the National Bank of Poland. The annex raised Sygnity's contractual fees by PLN 18m, with the total compensation capped at PLN 98.9m.
Outlook for Q4 FY2022/23
Sygnity slightly exceeded our expectations with the results for Q3 2022/23, reporting a high sales margin of 31.7% after a y/y rebound of 1.3pp. Our expectations for Q3’23, ending 30 September 2023, include a revenue of PLN 53.7m (+4.0% y/y) and a gross margin of 31.2%. We believe quarterly SG&A expenses may have grown significantly to a projected PLN 11.1m. As a result, we expect to see EBIT of PLN 5.7m after a 24% y/y rebound. We assume a neutral impact of financing activity and an effective tax rate of 19.0% for the quarter.
