Revenue increased by 24 per cent to £10.6m in the financial year, well ahead of house broker WH Ireland's forecast of £10m, a performance that will deliver a profit before tax of £200,000, compared with break-even in the prior year. This implies the company made pre-tax profit of £945,000 on revenue of £7m in the second half to the end of March 2016, signalling a major move into profitability. At the year-end, gross cash balances were £1.8m.
But it's prospects for the coming year that really excites me given the upside from a massive contract win worth up to €90m (£70m) with an Asian country that was announced last month ('Software radio surges on huge contract win', 8 Mar 2016), and the potential to convert a validated and growing sales pipeline worth over £200m into further firm orders.
The Asian contract will be fulfilled in three phases over a three-year period, during which time the company will work with the customer to assist with the specification, planning and implementation of the complete project as well as the supply of equipment, software, data and services. The pilot phase involves a detailed evaluation of the systems to be deployed and Software Radio will put in place a maritime domain management (MDM) system and supply vessel transceivers in one region in the country, the size of which is similar to the $5m (£3.5m) Middle Eastern contract it won last year. This helps underpin a chunk of budgeted revenue in 2016. Phase two will involve a slow rollout of the MDM system and detailed planning, while the third phase will be a national rollout.
The aim is to provide the country with effective maritime security with automated threat identification and management; monitoring, licensing and management of one of the world's largest fishing fleets to assist with the prevention of illegal fishing; monitoring and management of sensitive marine environments; enhanced maritime search and rescue; and general improved safety at sea.
Importantly, the multi-million pound project will be fully funded by the client so there are zero working capital requirements for Software Radio Technology, an important factor for any small-cap company winning massive contracts. Also, in accordance with the company's business model on previous contracts, it will be cash generative from the start. This means that the board under the leadership of chief executive Simon Tucker can target other major potential awards in its validated pipeline without being hindered by financial constraints.
I also feel that with contract momentum clearly building that previous analyst forecasts for the new financial year to March 2017, which suggest revenue rising to £12m and Software Radio reporting pre-tax profit of £700,000, are on the conservative side and open to upgrades as the year progresses.
So, having originally recommended buying the shares at 31.25p ('On the radar', 3 Mar 2015), and reiterating that advice last month at 25p, I am very comfortable maintaining that buy advice with the shares now priced on a bid-offer spread of 33p to 34.5p, valuing the equity at £44m, or two times book value once you mark stocks to market value. That's a low rating for a cash-rich company at an inflexion point, and one that is starting to convert the 18 mature projects in its sales opportunity pipeline.
Interestingly, a chart break-out above last month's high of 35.8p would open the door to a rally to the next resistance level around 43p. Buy.
