The contract will be fulfilled in three phases over a three-year period, during which time the company will work closely 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 will involve a detailed evaluation of the systems to be deployed and Software Radio will also 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 (£3.5) Middle Eastern contract it won last year. Phase two will involve a slow roll-out of the MDM system and detailed planning, while the third phase will be a national roll-out.
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; management of the fleet and fish stocks, monitoring and management of sensitive marine environments; enhanced maritime search and rescue; and general improved safety at sea.
I understand from Mr Tucker that the complete MDM system is expected to include a combination of AIS (satellite and terrestrial), radar, CCTV, and AtoN environmental sensors which will be installed across the country's extensive coastline; AIS transceivers of multiple types for vessels; and an integrated network of national, regional and local control rooms. 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.
Importantly, there is “zero working capital” required to fulfil this massive contract win given the funding structure, inline with the company’s business model on previous contracts. And although the majority of the contract value will be delivered in phase three, “it will be cash generative from the start”, adds Mr Tucker. It’s worth noting too that although this is by far the largest contract win in Software Radio’s history, I can reveal that “the company will earn gross margins of 50 per cent, if not higher.” It seems a win-win situation if it can execute full implementation of the contract to the client’s satisfaction.
I can also reveal that Mr Tucker is comfortable with house broker WH Ireland’s forecasts for the financial year to end March 2016 that point towards the company delivering revenues of £10m, up from £8.5m the prior year, and break-even at the pre-tax level. This implies Software Radio will at least turn in pre-tax profits of £745,000 on revenues of £6.5m in the second half to end March 2016, signalling a move into profitability. Mr Tucker has told the house broker not to change its forecasts for the new financial year to March 2017 which suggest revenues rising to £12m and pre-tax profits of £700,000, but I feel this is more the case of the company under promising, and hoping to over deliver. That’s because not only will Software Radio have the benefit of the first phase of today’s contract win, but Mr Tucker has told Investors Chronicle that “other projects in the company’s £200m pipeline are imminent to come in”.
The bottom line is that the odds now strongly favour Software Radio moving into sustained profitability. True, the shares are below my original recommended buy-in price of 31.25p ('On the radar', 3 March 2015), and are only 6 per cent ahead since I last updated the investment case (‘Break-even beckons’, 12 November 2015), but with contract momentum clearly building, and the business now profitable, then I remain positive on the investment upside. In fact, Software Radio is only being valued on 1.4 times book value once you mark stocks to market value, 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.
Trading on a bid-offer spread of 24.25p to 25p, valuing the company’s equity at £32m, I continue to rate Aim-traded shares in Software Radio a speculative buy and have an initial target price of 40p. It could yet prove conservative given that “there is material upside to forecasts once phase three (of the Asian contract) is reached”, according to deputy head of research Eric Burns at brokerage WH Ireland. Buy.
MORE FROM SIMON THOMPSON...
I have written articles on the following 81 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew Holdings: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p ('Investment company watch', 16 February 2016)
■ GLI Finance: Buy at 31p ('GLI Finance review offers potential for gains', 17 February 2016)
■ Trifast: Buy at 112p, target 140p ('Engineered for a higher rating', 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p ('Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)
■ Avation: Buy at 140p ('Aircraft deliveries mask Avation's lift off', 24 February 2016)
■ Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)
■ Town Centre Securities: Buy at 305p, target price 350p ('Property income play with capital upside', 25 February 2016)
■ Capital & Regional: Buy at 60.25p, target 66.5p to 70p ('Short-term trading buy', 29 February 2016)
■ Cambria Automobiles: Buy at 83p, target 95p; Vertu Motors: Buy at 71.75p, target 85p to 90p ('Lowly rated car dealers motoring back', 7 March 2016)
■ Sanderson: Buy at 80p, target 90p ('Tapping into cloud based profits', 8 March 2016)
■ H&T: Buy at 195p ('A golden opportunity', 8 March 2016)
■ 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
