Company Overview: Science Applications International Corporation (NYSE: SAIC) is one of the leading technology integrators, offering high-end solutions in engineering, IT, and mission solutions throughout the defense, space, civilian, and intelligence markets. The company offers technology and equipment platform integration, operation and program support services, engineering, logistics, and maintenance of ground and maritime systems. This apart, the company also offers end-to-end services like design, deployment, management, and operations, along with the security of its customers' IT infrastructure.
 

SAIC Details
 

 
SAIC Rides on Contract Wins & Acquisition Synergies: Science Applications International Corporation (NYSE: SAIC) is engaged in providing information technology and professional services, primarily to the United States government. The company has successful history of more than 50 years serving different government agencies, including the U.S. military; the U.S. Defense Logistics Agency; the U.S. Department of State; the National Aeronautics and Space Administration; and the U.S. Department of Homeland Security. The company serves its customers with more than 24,000 employees.
 
In FY20, the company recorded revenues ~$6.38 billion, of which ~98% came in from the U.S. government. Despite the budget and aggressive rivalry pressures impacting the industry, the company is well-placed to safeguard and increase its existing customer base. The company’s robust scale, size and prime contractor leadership gives the company a competitive advantage in the market, especially on large contracts. The company also remains on track to benefit in the future, owing to its reputation of successful program execution, competitive cost structure and efficiencies in assigning the right people, at the right time, in support of its contracts. In 2019, the company completed the acquisition of Engility Holdings, Inc. The acquisition is expected to be a key driver in executing its long-term strategy to be the premier technology integrator in the government services market and deliver sustained profitable growth. The acquisition also boosted the company’s margin profile and cash-flow generation capacity. In 2020, the company completed the acquisition of Unisys Federal which was in-line with the company’s long-term strategy.
 
Recently, the company received a $630 million contract from the U.S. Air Force for a period of 5 years to manage and modernize the critical hardware and software for its Technology Application Development and Sustainment (TADS) system in order to assist the expansion of accuracy and timeliness of weather reports. In another update, the company also won a five-year contract worth $2.9 billion to keep supporting the U.S. Army with its mission engineering capabilities. The company also received a $378-million, single-award, indefinite-delivery, indefinite-quantity (IDIQ) contract to deliver its enterprise IT services to the Federal Aviation Administration (FAA). At the beginning of June 2020, SAIC obtained a single-award, cost-plus-fixed-fee, and firm-fixed-price contract worth $60 million to continue providing engineering support to the U.S. Navy.
 

Historical Financial Performance (Source: Company Reports)
 
It is worth noting that the company will benefit from the continued flow of high-value contracts. The company’s total contract backlog stood at $16.6 billion as of May 1, 2020. Going forward, the company’s results are likely to benefit from a robust product portfolio, which, in turn, will boost the top-line and support the growth. The company’s capability to maintain its existing contracts along with the newly awarded ones throughout the customer portfolio is expected to be a tailwind in the near-term.
 
Looking ahead, the company is set to gain from several government contracts, which lends stability to its business and manages variation in revenues. Although the government generally has a long-winded approval process, the projects earn money for several years post-approval. The company witnessed a CAGR of 10.3% and 18.3% in revenue and net income, respectively over the period of FY16-FY20. Dividends also increased from $1.21 per share in FY16 to $1.48 per share in FY20, instilling investors’ confidence.
 
Q1FY21 Key Highlights for the Period Ended May 1, 2020: During the quarter, the company reported 
adjusted earnings of $1.38 per share, up from the year-ago quarter’s figure of $1.36, owing to a higher revenue base and decreased outstanding share counts. SAIC reported revenues of$1,757 million, which went up 9% from the prior corresponding period. The year over year increase was on the back of acquisition synergies of Unisys Federal. The company stated that its business remained strong amid the coronavirus-led crisis, which had a limited impact on its quarterly results.  It affected internal revenue growth by 3% and 5% post the adjustment related to COVID-19 impact. During the quarter, the company reported net bookings of $1.6 billion, indicating a book-to-bill ratio of 0.9. The company expected backlog of signed business deals at the end of the quarter to be $16.6 billion, out of which $1.5 billion signifies contracts gained via acquiring Unisys Federal.
 

1QFY21 Key Highlights (Source: Company Reports)
 
Operating Highlights: During the quarter, the company reported non-GAAP operating income of $106 million, up 5% on pcp. However, non-GAAP operating margin stood at 6%, down from 6.3% reported in the year-ago period, on the back of higher acquisition and integration costs, along with COVID-19 impact. Adjusted EBITDA for the quarter stood at $137 million, up from $135 million in the year-ago quarter. 
 

Result Analysis (Source: Company Reports)
 
Balance Sheet & Cash Flow Highlights: The company exited the quarter with a cash balance of $276 million, with total debt (long plus short) amounting to $2,884 million. The company reported operating cash flow of $367 million, considerably better from the previous quarter’s figure of $69 million. The healthy expansion shows cash provided from operating activities of Unisys Federal and $200 million of sales of receivables under the Master Accounts Receivable Purchase Agreement (MARPA). In 1QFY21, the company reported a free cash flow of $158 million. In 1QFY21, the company also implemented $39 million of capital, which includes $23 million in dividend payments and $16 million to mandatory debt repayment. 
 

Cash Highlight (Source: Company Reports)

Recent Update:
 
On June 18, 2020, the company announced that it has appointed Terry Biggio as its Senior Director of business development for the Federal Aviation Administration (FAA) and the Department of Transportation (DOT).
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 43.15% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. holds the maximum interests in the company at 9.63% and 9.35%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: The Company reported May’ FY21 gross margin at 10.4%. ROE, in the same time span, stood at 2.6%, higher than the industry median of 2.4%. May’ FY21 debt to equity ratio stood at 2.07x. In 1QFY21, the company made a deliberate debt repayment of $125 million and is assertive on the de-leveraging plan as earlier conveyed.
 
 
Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Risk Analysis: In each of the last three fiscal years, the company generated more than 95% of its revenues from contracts with the U.S. government, which included contractors or subcontractors. The company also expects to derive substantially from work performed under U.S. government contracts. As the company heavily depends on U.S. government agencies as its primary customer, the loss of any of these agencies could adversely impact future revenues and cash flows. Further, stiff competition from peers like General Dynamics, Northrop Grumman, Accenture, IBM, Unisys, and Agility Logistics, along with a leveraged balance sheet adds to the woes. 
 
Outlook: For FY21, SAIC predicts revenue to be in the range of $7.1 billion and $7.3 billion, which indicates 1% to 4% organic growth. The revenue outlook also reflects 10.5 months of business operation of the recently acquired Unisys Federal business and an unfavorable impact of $150 million from the coronavirus pandemic. Adjusted EPS for FY21 is expected to be in the range of $5.80-$6.10, which includes $25 million adverse impact from COVID-19 crisis. Free cash flow is expected to meet or exceed $500 million in FY21.
 

Guidance for FY21 (Source: Company Reports) 
 
 
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology 1: P/E Multiple Based Relative Valuation (Illustrative)
 
P/E Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology 2: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of SAIC closed at $74.24 with a market capitalization of ~$4.3 billion and current yield of 1.84%. The stock made a 52-week low and high of $45.45 and $96.8 and is currently trading above the average of its 52-week trading range. The stock gave a positive return of ~50.64% in the last three months. In 1QFY21, the company recorded year-over-year growth in both revenues and earnings, owing to higher contract wins and acquisition synergies. Considering the above factors, we have valued the stock using P/E and EV/EBITDA multiples based relative valuation method (illustrative) and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like CACI International Inc (NYSE: CACI), General Dynamics Corp (NYSE: GD), Leidos Holdings Inc (NYSE: LDOS), to name few. Hence, we recommend a “Buy” rating on the stock at the current market price of $74.24, down 5.08% on 24 June 2020.
 
 
SAIC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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