The key take for me in the results was news that the £3.6m period-end order book “will be delivered in the second half” according to chairman Simon Rogers, and that “additional contributions from the new US Coastguard (USCG) AIS Maritime Domain Management (MDM) system rule which has a compliance deadline of 1 March 2016, and from a potential new mandate in Asia” are expected to generate additional contributions to revenues. This means that having posted first half revenue of £3.6m, the full-year revenue forecast of £10m from analyst Eric Burns, head of research at brokerage W.H. Ireland, looks very achievable. That’s because Mr Burns hasn’t factored much in the way of additional contributions from the US Coastguard contract, nor from new contract wins in Asia.
That’s a very conservative assumption to make because the US Coast Guard’s regulations, published in the spring of 2015, require more commercial vessels operating in US territorial waters - such as fishing boats, tugs, and ferries - to install and operate a USCG-certified AIS transceiver. 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 point being that failure of boat and ship owners to install these AIS transceivers by March next year will make their insurance invalid when navigating their vessels through US waters, thus supporting demand for Software Radio’s USCG certified Class A and Class B transceivers from distributors addressing the US commercial boat market. The USCG mandate covers between 12,000 to 17,000 boats and Software Radio sells its kit to distributors for $1,000 (£667) a time.
I would also flag up that the company has only recently started delivering on a US$5.3m (£3.5m) contract with a Middle Eastern government for the provision of a MDM system, the majority of revenues from which will be earned in the second half of the current fiscal year. In addition, Software Radio Technology has won an order for AIS Class A transceivers worth $700,000 (£450,000) for deployment on Philippine fishing vessels with delivery in the current financial year. This gives further confidence that the company can turn in pre-tax profits of £745,000 on revenues of £6.5m in the second half to at least hit break-even for the 12 month trading period. So with contract momentum building, this still looks like a pivotal year for the business.
A pivotal year
It’s worth noting that although the company posted a first half operating loss of £720,000 on revenue of £3.6m, it actually made a cash profit of £40,000 after adding back non-cash depreciation and amortisation charges. And tight working capital management meant that cash on the balance sheet actually rose by £250,000 to £2.37m at the end September period-end, so the business is not draining cash either. After accounting for a loan of £1m outstanding, Software Radio has net funds of £1.37m.
The stock position is comfortable too with current assets over three times current liabilities. This is known as the current ratio, a measure of liquidity. Moreover, current assets of £8.7m include inventories of £5.2m which are stated in the accounts at cost, but I understand that these stocks have a sale value to customers in excess of £15m. This offers confidence that the company will be able to fund its contracts from working capital and inventories without the need to tap shareholders.
Of course, in order to spark a major share price re-rating the company needs to convert its pipeline of 18 mature projects, worth around £200m in sales, into firm contracts. I outlined the varied nature of these contracts in quite some detail when I initiated coverage in the spring 'On the radar', 3 Mar 2015).
True, the shares are below my original recommended buy-in price of 31.25p ('On the radar', 3 March 2015), and also below the 27p level when I last updated the investment case (‘Cashed up for cash returns’, 22 September 2015), but with contract momentum building, and the business moving towards break-even, then I am not changing my positive stance. Indeed, Software Radio is only being valued on 1.35 times book value once you mark stocks to market value, a low rating for a company at an inflexion point, and where conversion of just one of those 18 major projects in the sales opportunity pipeline would be truly transformational.
Interestingly, the technical indicators are turning positive. There was positive divergence on the daily chart on Tuesday this week with the share price testing the major 20p support level, but the reading on the 14-day relative strength indicator (RSI)failing to make a new low. Also, there was a reversal on the daily candlestick chart with what looks like to me like a hanging man formation, the price closing above the opening price and reversing all the intra days falls.
Trading on a bid-offer spread of 22p to 23.5p, valuing the company’s equity at £30.6m, I continue to rate Aim-traded shares in Software Radio a speculative buy and have a target price of 40p.
Please note that I have published two columns today, and nine so far this week, all of which are listed on my home page.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)
■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 November 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
