- £3.5mn cash profit 40 per cent ahead of forecast
- Adjusted pre-tax loss cut from £6.4mn to £0.2mn, materially better than £1mn forecast loss
- EPS of 0.3p well ahead of expectations due to £0.7mn tax credit
- Post year-end placing and Primary Bid offer raises £5.4mn
- £160mn contracted order book and £1.4mn bid pipeline
Aim-traded SRT Marine Systems (SRT: 53p), a global leader in technology used to track maritime vessels, has released full-year results materially ahead of analyst expectations. The group is also set fair to deliver a step change in profitability in the new financial year as revenue ramps up.
SRT has a growing validated pipeline of contract opportunities worth £1.4bn and a £160mn contracted order book that includes a massive $180mn (£140mn) award to supply an integrated maritime surveillance and intelligence system to a national Coast Guard (‘This global leader has won a game-changing contract’, 18 May 2023). Chairman Kevin Finn expects to see “some of these tenders convert into contracts in the coming months.” It's hardly surprising given that the uncertain geopolitical situation is placing even greater onus on fishery departments and coastguards to enhance the safety and security of their national waterways and borders.
New system contracts have initial working capital requirements during the first few months to fund equipment purchases prior to first deliveries and subsequent receipt of customer payments. This is typically five per cent of the contract value for a period of three to six months depending on a specific project becoming cash positive. The increased working capital required to support the rapidly growing contracted order book explains why the board raised £5.4mn at 50p a share through an equity raise in late June 2023. SRT also extended its secured loan note programme from £20mn to £40mn to bridge temporary working capital gaps during the early stages of system projects until customer payments are received.
Booming pipeline of contract opportunities
It’s a sensible move given that house broker FinnCap estimates SRT now has a £380mn pipeline of contract opportunities for delivery over the next three years, including £40mn of “imminent system contract wins”. The brokerage highlights two projects worth £30mn that are expected to be announced soon for delivery in the 2024-25 financial year. They form part of a £150mn fisheries contract with an existing customer in South-East Asia. In addition, SRT recently announced a £10mn follow-on contract with an existing coast guard customer for delivery within 12 months of the formal contract being signed.
Based solely on signed and announced contracts as well as revenue from transceiver sales, FinnCap predicts revenue will rise 133 per cent to £70.5mn in the 12 months to 31 March 2024. On this basis, expect full-year pre-tax profit of £7.4mn and earnings per share (EPS) of 3.8p. Analysts predict cash flow from operating activities of £6.3mn will match planned capital expenditure, pencilling in closing net debt of £1.5mn on 31 March 2024.
Moreover, assuming SRT can continue to ramp up revenue to £105mn in the 2024-25 financial year as FinnCap anticipate, pre-tax profit could surge to £11.8mn and deliver EPS of 6.1p. Cash flow from operating activities is projected to more than double to £14.3mn to deliver free cash flow (FCF) of £6.8mn and move SRT into net cash of £5.3mn by March 2025. This implies that the shares offer a FCF yield of 6.6 per cent for the 2024-25 financial year and are rated on prospective price/earnings (PE) ratios of 14.2 (2024) and 8.8 (2025).
That’s a low rating for a business which has a growing order book and one that is now seeing high demand for its state of the art national-scale integrated maritime surveillance systems. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.95 [UK].
Promotion: Subject to availability, the books can be purchased for the promotional price of £25 plus £5.75 postage and packaging.
They include case studies of Simon Thompson’s market-beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential.
