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Hunting down lowly rated tech plays

Two small-cap technology companies are both trading on 10 times earnings estimates even though analysts have been upgrading earnings expectations
Hunting down lowly rated tech plays
  • Annual revenue of at least £41mn and cash profit of £6.2mn both exceed market expectations by more than 10 per cent
  • Analysts upgrade full-year operating profit forecasts by 16.5 per cent from £3.5mn to £4.1mn
  • $1.37mn order for the supply of SLE6000 ventilators to Egypt.

Crawley-based Inspiration Healthcare (IHC:100p), a fully integrated medical technology company with a strong focus on the high-growth neonatal intensive care market, has raised full-year earnings guidance yet again, having previously prompted analysts to upgrade their operating profit estimates by 12 per cent in the autumn.

Buoyed by the July 2020 acquisition of SLE, a designer and maker of ventilators for neonatal intensive care, the launch of new products and increased penetration into overseas markets, Inspiration now expects annual revenue to rise by almost 11 per cent from £37mn to £41mn. The prior year result included £7.3mn of one-off Covid-19 ventilator orders, so effectively the group’s core business has delivered 38 per cent revenue growth in the 12 months to 31 January 2022. Following double-digit profit upgrades, house broker Cenkos Securities predicts annual cash profit of £6.2mn and operating profit of £4.1mn, the latter being a third higher than market expectations prior to last October’s upgrades. The broker also forecasts cash profit of £6.9mn for the 2022/23 financial year based on revenue climbing by 12 per cent to £46mn. The higher guidance looks fully justified.

That’s because the outperformance is being driven by leveraging the group’s enlarged international distribution network – 90 per cent of SLE’s sales are export orders – and cross-selling opportunities across a much larger customer base. Importantly, the strong sales momentum has continued since the financial year-end. For example, Inspiration has just won an order worth US$1.37mn (£1mn) for the supply of SLE6000 and SLE6000c ventilators to Egypt. Used extensively in neonatal intensive care units (ICU) to treat premature and sick babies, the group’s high-specification infant ventilators offer a range of conventional modes with extra options for non-invasive ventilation, high frequency oscillation ventilation and high flow oxygen therapy.

It’s a fast-growing market segment; the global market for neonatal ICU equipment is forecast to grow by 50 per cent to $9bn by the mid-2020s, driven by rising numbers of premature deaths, increasing complications at birth, improving healthcare infrastructure and rising global healthcare spend. To support the ongoing growth, Inspiration has invested in a new manufacturing, tech support and research and development (R&D) facility which is on track to complete in April. The board has also invested in management and systems to improve sales conversion rates.

I first suggested buying the shares at 75p (Alpha Research: ‘Profit from a medical technology winner’, 27 October 2020) and the share price got within pennies of achieving my 150p fair value estimate after my last update (‘Backing a med-tech winner’, 13 October 2021) before succumbing to profit taking. The de-rating since then is not only at odds with the operational outperformance, but means that Inspiration’s modest enterprise valuation to cash profit multiple of 10 times is massively below that of global peers Fisher & Paykel Healthcare (NZ:FPH) (20 times) and Natus Medical (US:NTUS) (36 times). A small dividend adds to the attraction, too. Buy.


SRT Marine reinstates guidance

  • Contract signed for first phase of £40m SRT-marine domain system project
  • Contract to supply commercial AIS Class A transceivers to the Panama Canal
  • Conservative profit estimates reinstated

Aim-traded SRT Marine Systems (SRT:44p), a global leader in AIS, an advanced identification communications technology used to track and monitor maritime vessels, has now signed a £40m contract with a national coastguard for a national scale marine domain awareness (MDA) system to track, monitor and manage all maritime activity in their territorial waters. A further £30mn of contracts are expected to be signed imminently, too. These awards not only put the business firmly back on track after Covid-19 travel restrictions delayed contract implementation, but support a major ramp up in SRT’s profits to reverse three years of losses.

To put this into perspective, house broker finnCap expects annual revenue to rise seven-fold to £56mn in the 12 months to 31 March 2023 to produce a cash profit of £11.1mn and pre-tax profit of £6.8mn. On this basis, expect earnings per share (EPS) of 4.1p. Moreover, operating cash flow is forecast to rise 13-fold to £7.8mn which should produce free cash flow of £2.5mn after accounting for interest payments (£0.7mn) and capital expenditure (£4.6mn). The estimated free cash flow is forecast to slash net debt from £6mn to £3.5mn by 31 March 2023, thus transferring more of the economic value from debt to equity holders.

Furthermore, profit forecasts are conservative as they exclude “several additional significant contracts from the current pipeline that management expect to sign”. In fact, SRT’s directors have increased their validated sales pipeline from £550mn to £600mn since I highlighted the investment case (Making waves’, 6 January 2022) even though the £40mn major contract has now been converted. Please note I still believe that SRT could be making £10m of annual pre-tax profit if three other contracts (two in the Middle East and one in Asia) are converted. These are worth worth £54m of additional revenue.

It’s worth noting, too, that the electrical component supply chain issues that have held back deliveries in SRT’s smaller transceiver business are expected to ease in the next 12 months, thus enabling the group to fulfil its growing order back log and ongoing end-user demand. For example, SRT’s em-trak marine electronics subsidiary has just received a contract to supply commercial AIS Class A transceivers to the Panama Canal.

Trading on a modest price/earning (PE) ratio of 11 for the 2022/23 financial year, and with major MDA contracts now being converted, I am raising my target price from 55p to 65p with the investment firmly risk skewed to the upside. Buy.


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