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Sumo Group Plc

Co-Dev sales growth of 51% in H118 underpin forecasts

Sumo Group (LON:SUMO) first interim results as a plc revealed excellent organic group sales growth of 36% (combining Co-dev at 51%, Own IP and Royalties) and adj. EBITDA/PBT growth of 46/43% YoY, normalised for exceptional items and one offs. These H1 figures and strong current trading, combined with a growing pipeline of exciting business opportunities underpin our unchanged estimates. Our FY forecasts now include a small dilution from The Chinese Room acquisition of c.£200k, and hence implies a modest underlying upgrade. This provides further confidence on our 19/20 estimates and in our view the risk lies to the upside. Current order visibility provides for well over 90% coverage of our FY18 revenue estimate and UK staff utilisation has been over 95% YTD, slightly ahead of our forecast.

H1 sales growth benefitted from utilisation rates of over 95% in the UK. This is slightly above our expected 94% and with minimal seasonality expected, the H1 sales figure of £19.6m (excluding pass-through revenue) is 52% of our FY estimate. This, combined with rising H2 FTE’s and similar utilisation in H2, provides comfort over our full year forecasts. With the vast majority of development fees payable in GBP, the FX impact remains minimal.

Adj EBITDA at £5.0m increased c.46% YoY. This supports our full year profit forecast of £10.3m, which includes around £6m for VGTR, as originally estimated (VGTR is available until at least through 2023). The H1 EBITDA margin was 26% and we assume a slightly higher FY margin; a consequence of operating leverage. We continue to expect 28% to 29% margin in 19/20 as Royalties and Own IP revenue streams increase from those forecast in 2018. In 2018 there have been several co-development royalty contracts originated at slightly lower gross margin, but which should enable high royalty margins (vs Co-Dev sales) to be obtained from FY19 onwards.

We expect the net cash position to be around £5m to £6m at Dec 18. As commented on in our note dated 24th April this is due to negative WC, in turn because of timing effects. The FY17 WC benefitted cumulatively by c.£6m (accelerated VGTR receipt, delayed payment to a large customer and IPO fees paid in January). These timing impacts reverse in 2018 and combined with anticipated sales growth and VGTR timing, produce a WC estimated outflow of c.£13m. With a blue-chip customer base, debtor days are low. In FY19 we expect a more normal WC situation (barring any timing impacts) of a small positive inflow. The net cash position and future cash flows provides an adequate base for strategic M&A.

The market demand for Co-Dev services remains strong and the business activity pipeline is robust. We believe that the c.10% market growth for outsourced services continues unabated, with the area of co-development particularly attractive. The shares remain at more than a 10% discount to the UK peer group sector average for 19/20.