Eleven years ago the International Maritime Organisation ordered big ships to carry automatic identification systems (AIS), creating the first significant market for tracking equipment developed by Software Radio Technology (SRT). It hasn't been plain sailing since then, though, and the timing of government orders is unpredictable. But large-scale rollouts backed by regulation are under way and the inevitable boost to profits is not reflected in SRT's share price.
- Strong full-year results
- Big orders on the cards
- Growing customer base
- Shares trade at discount to peers
- Lumpy business
- Slow retrofit sales
The regulation-driven, structural growth story that underpins SRT is very alluring. Perfect for fighting piracy, terrorism, drug trafficking, illegal immigration and unauthorised fishing, customers in the US, China, Russia, India and the Middle East have already bought transceivers and so-called Identifiers from SRT worth millions of dollars. China alone runs a fishing fleet of half a million boats and all will have devices by February 2015. Fitting just a fraction has already netted SRT $5m (£3.2m). Elsewhere in South East Asia's congested waterways, the opportunity is even larger.
India, with 300,000 fishing vessels, is committed to further trials, and the Americans are already fitting SRT's Identifiers to bigger boats in the Gulf of Mexico to tackle illegal immigration. More orders are inevitable. Globally, there are 800,000 vessels with existing mandates to fit tracking devices and about 30 market opportunities for SRT all now in the implementation phase. One particular deal would easily double forecast revenue for this year, according to chief executive Simon Tucker. Another is worth four times that.
But while government plans are known, the timing of orders over the next three years is not. That has been SRT's problem over the years. For example, in the 2011-12 financial year, hold-ups in EU mandates resulted in a £3m drop in revenue which almost wiped out profits. Still, SRT now has over 110 clients, significantly reducing its dependence on one-off government contracts and experts acknowledge its technology is better and cheaper than rivals.
SOFTWARE RADIO TECHNOLOGY (SRT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 27p | MARKET VALUE: | £31.2m | |
| TOUCH: | 26-28p | 12-MONTH HIGH: | 31p | LOW: 18p |
| FWD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 10p* | NET CASH: | £1.5m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 3.56 | -0.39 | -0.20 | nil |
| 2011 | 9.15 | 1.94 | 2.20 | nil |
| 2012 | 6.17 | 0.17 | 0.20 | nil |
| 2013 | 10.0 | 1.19 | 1.30 | nil |
| 2014** | 15.0 | 3.10 | 2.20 | nil |
| % change | +50 | +161 | +69 | - |
Normal market size: 10,000 Market makers: 9 Beta: 0.5 *Includes intangible assets of £4.4m, or 3.8p a share **WH Ireland estimates | ||||
Recent performance has been impressive, with revenue rocketing 62 per cent in the year to March 2013, while low fixed costs meant a near seven-fold increase in pre-tax profit. Net cash will have ballooned since the year-end given late shipments left £3.4m of receivables on the books. However, talk that trading would be weighted toward the second half of the current year took the wind out of SRT's shares' sails and the recession has slowed retrofit sales to the leisure market. But analysts at Edison Research reckon SRT will hit sales targets even if less than 5 per cent of the existing mandates are delivered.
That implies current earnings forecasts are hugely conservative and deliveries against both existing mandates and new mandate awards will drive upgrades. Even now, SRT's shares are valued at just 12 times forward earnings compared with an average of 15 times for other technology hardware stocks, based on Edison forecasts.
Crucially, last month's deal with a Canadian AIS satellite network opens up a route to significant recurring revenues. It's a big technical hurdle, but it will eventually allow SRT to sell bundled data on vessels currently out of AIS's 50-mile range. SRT's electronic markers for buoys that measure tide, currents and other data also have massive long-term potential.
