Aim-traded SRT Marine Systems (SRT: 55p), a global leader in technology used to track maritime vessels, has signed a massive $180mn (£145mn) contract with a foreign coastguard customer.
Delivery of a full marine domain awareness (MDA) system over a two-year implementation period accounts for 85 per cent of the contract value, with the balance of the revenue relating to an eight-year support and data services contract. The signing of the contract follows the completion of a project-specific intergovernmental UK export finance loan agreement, which the undisclosed customer’s government is using to fund the project.
Specifically, SRT will deliver a state-of-the-art national-scale integrated maritime surveillance, intelligence and control system that will integrate multiple coastal, vessel, drone and satellite sensor systems within a network of command centres. Operators will benefit from SRT’s proprietary analytics and visualisation technologies, which enable enhanced vessel and event detection across the customer’s entire marine domain, thus providing a high level of maritime domain situational awareness.
The contract is by far the largest SRT has been awarded. It is unlikely to be the last. The directors highlight a £380mn pipeline of systems projects that have a high likelihood of converting over the next one to three years, forming part of its £1.3bn total pipeline of contract opportunities.
Bumper profit growth forecast
- Robust earnings growth forecasts underpinned by bumper order book
- Potential for SRT to outperform
- Secured loan note programme extended to support working capital
Based on earnings from contracts signed, analysts at house broker FinnCap have introduced forecasts for the current financial year to 31 March 2024. These indicate that SRT is on course to more than double both annual revenue to £70.9mn and gross profit to £23.6mn, a result that covers the anticipated £3mn increase in operating expenses to £11.2mn and boosts cash profit fivefold to £12.4mn.
After accounting for £4.4mn of non-cash depreciation and amortisation charges, it means that SRT should move from a forecast operating loss of £0.3mn in the 2022-23 financial year to an operating profit of £8mn. The improvement in profitability highlights the operational leverage of the business as two-thirds of the £12.9mn incremental gross profit earned passes through to operating profit.
Importantly, SRT has the balance sheet funding to deliver the contract, having extended its secured loan note programme from £20mn to £40mn earlier this month. The credit line can be used to bridge temporary working capital gaps during the early stages of system projects until the first payments are received for the initial deliveries. FinnCap expects current group net debt of £5mn to increase slightly to £5.9mn by March 2024, before projected free cash flow of £6.9mn the following financial year moves SRT back into a net cash position of £1.1mn by March 2025.
Modest rating
There are sound prospects of SRT delivering even more dramatic profit growth in the 2024-25 financial year when analysts expect revenue to rise almost 50 per cent to £105mn. The estimate is based on the current order book and conservative-looking expectations that £30mn of SRT’s £380mn near-term bid pipeline will be converted into firm orders. On this basis, over 85 per cent of the £5.2mn incremental gross profit earned passes through to operating profit, hence FinnCap’s forecast of a further sharp rise in operating profit from £8mn to £12.5mn in the 12 months to 31 March 2025.
Furthermore, because SRT has significant historic tax losses, pre-tax profit and net profit forecasts are identical at £7.1mn (2024) and £11.6mn (2025), meaning the £100mn market capitalisation company could deliver earnings per share (EPS) of 4p and 6.5p, respectively, on a nil tax charge. It also implies the shares are rated on price/earnings (PE) ratios of 13.8 (2024) and 8.5 (2025).
Reassessing fair value
The prospect of SRT delivering a surge in earnings has not been lost on investors as the share price soared 18 per cent today to return to last autumn’s highs. It is also closing in on the 60p target I outlined when I last suggested buying the shares, at 42.5p (‘This marine tech company is set for a re-rating’, 23 March 2023). The profit estimates for the 2023-24 financial year fully support the current share price – they are very close to the figures from my own financial models, which I quoted in that article. However, expectations of 61 per cent EPS growth the year after are certainly not embedded in the current valuation.
In the circumstances, I am raising my target to 80p to value SRT’s equity at £145mn, equating to 12 times next year’s operating profit estimates to enterprise valuation, a target multiple justified by the 35 per cent return on capital employed (ROCE) the group is forecast to deliver both this year and next. Buy.
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