- First-half revenue falls 70 per cent to £5.5mn
- Interim pre-tax loss of £4.6mn
- Full-year profit guidance maintained
The absence of any revenue from its maritime systems business explains the hefty pre-tax loss for Aim-traded SRT Marine Systems (SRT: 38.5p). However, the directors expect substantial milestone payments to be earned in the second half from the group’s £160mn contracted order book, so are confident of hitting analysts' full-year expectations.
To put the second-half forecast growth into perspective, house broker Cavendish expects SRT to deliver £55.8mn of revenue from its systems business and £9.6mn of revenue from its transceiver activities. On this basis, the £74mn market capitalisation company could more than double annual revenue from £30.4mn to £70.9mn and report pre-tax profit of £7.2mn in the 12 months to 31 March 2024.
Of course, there is execution risk in delivering contracts and a hefty second-half weighting, too. That said, chief executive Simon Tucker highlighted to Investors' Chronicle the specific milestones from key contracts that support full-year revenue expectations.
These include a £1mn final payment on a fisheries contract nearing completion in the Philippines; initial payment of £11mn on the implementation of the next phase of a £40mn Middle East Border Agency contract in the first quarter of 2024; and £41mn of payments when first deliveries of equipment are made on a $180mn (£145mn) contract with a national coast guard in South East Asia that SRT announced six months ago. Specifically, the group is supplying an integrated maritime surveillance and intelligence system to the client.
In addition, the directors expect a contract to be issued soon for the follow-on phase of a maritime surveillance system with a long-standing Middle Eastern coastguard. Potentially, some of the deliveries on that contract could fall into the second half, too. Shareholders can also expect other announcements on SRT’s £380mn medium-term (one to three years) pipeline that forms part of its £1.4bn validated pipeline of contract opportunities.
Transceiver demand booming
It’s worth noting that demand for the transceiver business, which accounted for all of first-half revenue of £5.5mn, is benefiting from increased adoption resulting from regulation. For instance, the Port of Antwerp has recently extended existing regulation for certain classes of commercial vessels to make it mandatory that they have an automatic identification system (AIS), which provides the ship’s position and identification to coastal authorities.
Furthermore, Tucker noted that thousands of fish farms in the EU will require tracking and monitoring using aid to navigation (ATON) systems from 2024. The device is external to a vessel and assists navigators in determining their position or safe course, or to warn them of dangers or obstructions to navigation. SRT has appointed a dedicated salesperson to work on the growing global market opportunity for its high-margin digital ATON systems, which provide specialist navigation devices for buoys and infrastructure. It’s already bearing fruit as Tucker revealed to the IC that SRT has issued quotations to potential clients that have a contract value of £15mn.
True, the transceiver business has a seasonal second-half bias. However, factoring in underlying market growth and incremental demand from new product launches, it’s reasonable to expect the unit to deliver 26 per cent growth to achieve Cavendish’s full-year revenue estimate of £15.1mn. Moreover, with shipping of SRT’s new NEXUS VHF/DSC radio system (allows digital information transfer not just voice) slated for autumn 2024, and SRT entering the lucrative US market, Cavendish expects divisional revenue to surge by more than half to £23.2mn in the 2024-25 financial year. A soft launch of the new product is already generating solid orders.
Growth opportunity undervalued
Based on Cavendish’s maintained forecasts, SRT’s shares are rated on a price/earnings (PE) ratio of 10 and enterprise valuation to operating profit multiple of nine times for the 12 months to 31 March 2024. Both earnings multiples fall to only six times in the 2024-25 financial year when analysts expect revenue to increase 48 per cent to £105mn and pre-tax profit and earnings per share (EPS) to rise by more than 60 per cent to £11.8mn and 6.2p, respectively.
Importantly, the business is well funded, having drawn down £7.7mn of a £40mn loan note facility with LGB Capital Markets solely for working capital purposes. Net debt of £5.7mn should reduce to £2.2mn at the financial year-end (31 March 2024) with the benefit of the second-half operating cash flow. Cavendish forecasts net cash of £3.6mn on 31 March 2025.
So, with the contracted order book materially de-risking second-half revenue and earnings forecasts, I feel the share price pullback since SRT raised £5.4mn, at 50p, in a placing and released better-than-expected annual results (‘This stock has a very low rating and a growing order book’, 27 July 2023) is worth exploiting. Buy.
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