Interestingly, the positive news flow has taken the share price to the top of a rising bull flag formation around the 43p level which neatly coincides with a prior resistance level dating back to April 2011. If that price point can be overcome then a move to the 55p bull market high dating back to September 2007 could be on the cards as there is little in the way of technical resistance thereafter to hinder progress. Of course, to drive the shares to that elevated level the company will need to win yet more contracts, but this looks likely given the current sales momentum.
Indeed, the company’s latest awards include an order for its AIS Coast Stations from Trinity House in the UK for deployment to enhance maritime safety and security in their jurisdiction as part of the UK's growing AIS network monitoring and management capabilities. Trinity House is highly respected by maritime authorities worldwide and analyst Eric Burns at house broker WH Ireland believes the award should have a positive effect on the company’s international reputation. AIS is an international maritime tracking and monitoring technology developed by the International Electrotechnical Commission (IEC) under the auspices of the International Maritime Organisation (IMO), and which has become the technology of choice to enhance maritime domain awareness across the world. In particular, the technology is used for vessel tracking; anti-collision; search and rescue; waterway, port and coast security; pollution monitoring; and fisheries management.
The second contract win, which was announced this morning, involves supplying the Panama Canal with the company’s GeoVS maritime display and data management VTS system. GeoVS technology converts real time data streamed from sensors such as radar and AIS located in marine surroundings, combines it with multi-layer electronic marine charts and instantly creates a live 3D visualisation of the marine domain. The user is then able to move seamlessly around the marine domain in full 3D to gain a much improved understanding of the area. The technology is a significant progression from the traditional representation of the marine domain on flat electronic chart displays.
The Panama Canal is undergoing a large multi-billion dollar investment programme which has seen its capacity increased significantly. The use of Software Radio’s technology will enhance situational awareness for operators and will be used to monitor and control vessel activity through the canal. The system is scheduled to be installed and fully operational before the end of 2016.
Contract momentum underpins forecasts
In my view, both contract awards not only underpin the investment case, and give further substance to analyst forecasts for the current financial year, but also highlight the growing demand for the company’s technology and growing reputation in its market place. Furthermore, with the board led by chief executive Simon Tucker optimistic on converting its £200m validated sales pipeline into firm awards, having won an €90m (£76m) contract with an Asian country just before its March year-end ('Software radio surges on huge contract win', 8 Mar 2016), then there is clear scope for a sharp rise in profits this year. Mr Burns at WH Ireland expects Software Radio to deliver revenues of £12m and increase pre-tax profits by over 150 per cent to £700,000 in the 12 months to end March 2017. However, I believe this could prove to be a conservative forecast if the contract momentum continues to build. I would also point out that contracts are cash generative from the start as Software Radio has no working capital requirements because the client funds costs. This means that the board can target major potential awards in its validated pipeline without financial constraints.
Of course, investors have cottoned onto what’s going on here which is why the share price has risen by 38 per cent since I initiated coverage ('On the radar', 3 Mar 2015). At the current price, the cash rich company has a market value of £55m and is trading on 70 times earnings estimates. However, having reached an inflexion point and turned profitable last year, as contracts are converted from the pipeline and the huge Asian contract is delivered, expect profits to rise sharply and reduce that earnings multiple significantly. I would also point out that the translation effect on overseas orders will have positive impact on the company’s revenues and profits following the slide in sterling in the past 10 days. Indeed, the Asian contract is worth 10 per cent more in sterling terms than it was at the time of the award in March.
It’s an exciting story and one where I am happy to maintain my previous speculative buy recommendation ('Software Radio making waves', 7 June 2016) with Software Radio’s shares priced on a bid-offer spread of 41p to 43p. Buy.
