The marine domain awareness (MDA) market is at the start of a long-term period of sustained growth as governments and national agencies across the world upgrade their maritime intelligence capabilities from analogue systems that date back four decades.
The increasing adoption of intelligent digital maritime surveillance systems is also being driven by the uncertain geopolitical situation that places greater importance on fisheries departments and coastguards to enhance the safety and security of their national waterways and borders.
This backdrop is good news for Aim-traded SRT Marine Systems (SRT: 42.5p), a global leader in AIS, an advanced identification communications technology used to track and monitor maritime vessels. Indeed, the group has just secured a massive £145mn contract to provide a full MDA system to a new foreign coastguard customer. Due to the strategic importance and sensitivity of national civil defence infrastructure projects, SRT is bound by confidentiality on naming the customer and country.
The customer is financing the project by way of a loan organised and supported by the UK government overseas UK Export Finance agency. The project will proceed on completion of the loan arrangement process between the two governments within the next few months. Around 80 per cent (£116mn) of the contract value is expected to be booked in the 2024 and 2025 financial years (31 March period end), a game-changer for SRT.
Transformational contracts
- £535mn mature validated sales pipeline
- Potential contract worth £50mn a year with a new customer over the next decade
- Slower deployment on existing contracts means revenue project milestone to be pushed into 2023-24 financial year
In a pre-close trading update, the directors also revealed that almost half of the group’s £535mn mature validated sales pipeline (VSP) are new follow-on projects from existing customers who are looking to move on to the next phase of their long-term marine surveillance strategies. The balance are new projects from new customers and include the said £145mn contract.
Prior to the latest contract win, SRT had secured £75mn of systems contracts from three customers in three countries: one fisheries contract in the Philippines (completes in September 2023), and two coastguard system contracts, one of which is live and fully paid for and the other is due to complete by June 2024. There is around £20mn of revenue still to book on these contracts, but the real opportunity is the follow-on contracts for the next phases, which are worth £260mn. Bearing this in mind, the directors have revealed that one of its existing customers has now secured funding of up to £150mn to undertake a significant expansion of its existing SRT-supplied system from 2024.
In addition, it has had a series of meetings at the highest level with another prospective new coastguard customer who wishes to build a national-scale system over the next decade in a series of incremental projects. With an indicative annual budget of £50mn and project commencement in 2024, this could be huge.
Slower contract deployment impacts revenue milestones
The positive contract news explains why SRT’s share price rallied 12 per cent even though the directors lowered their guidance for the 2022-23 financial year, mainly due to slower-than-expected deployments on existing contracts that meant material revenue project milestones will now be recognised in the early part of the 2023-24 financial year.
Analysts at FinnCap had expected SRT to deliver £56mn of annual revenue (split £10mn from transceivers and £46mn from systems) in the 12 months to 31 March 2023, but the group will now only deliver £30mn (£12mn from transceivers and £18mn from systems). That said, this is a timing issue, rather than loss of revenue as the contracts are still in place. However, it means that SRT is now likely to report a cash profit of £2.5mn on revenue of £30mn rather than a cash profit of £11.1mn on revenue of £56.6mn.
This has implications for cash flow as the group is forecast to have closing net debt of £5mn (31 March 2023) rather than net cash of £1.8mn, albeit the cash inflow from the delayed revenue milestone payments in the next quarter will significantly pay down borrowings. The group doesn’t have a liquidity problem.
Forecasts
Analysts are holding back from releasing their profit forecasts for the 2023-24 financial year until the £145mn contract starts. However, factoring in the £20mn outstanding revenue to be booked on existing contracts, and £11mn to £12mn of annual revenue from the transceiver business, SRT would only need to book £28mn of revenue from the £145mn contract to deliver £60mn of annual revenue in the 12 months to 31 March 2024. Based on a 20 per cent cash profit margin, the group could be making pre-tax profit of £7mn (margin of 12 per cent) and earnings per share (EPS) of 4p, implying the shares are currently rated on a modest forward price/earnings (PE) ratio of 10.6.
So, having advised buying the shares last autumn, at 31.5p (‘Get on board for a profitable passage’, 3 October 2022), and reiterated that advice, at 49p, at the interim results (‘Making waves’, 15 November 2022), I feel it’s still worth getting on board for what is likely to be a profitable passage over the coming year. My target price is 60p. Buy.
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