A marine technology company building momentum

Aim-traded SRT Marine Systems (SRT: 45p), a global leader in technology used to track maritime vessels, has won a massive $213mn (£162mn) contract to deliver an integrated maritime surveillance system for a sovereign government. The award is subject to completion of the formal contract and associated performance bond, both of which are under way and expected to be completed prior to the end of November, with implementation commencing immediately thereafter.

SRT will provide the government’s national coastguard with a new state-of-the-art national maritime surveillance system, which integrates multi-sensor surveillance platforms, both fixed and mobile, with several integrated command centres located across the country. Listed as one of two $200mn potential projects in a trading update in June 2024, the contract includes the turn-key delivery of the system within two years, followed by a 10-year support and maintenance package.

In May 2023, SRT won a $180mn contract to supply an integrated maritime surveillance and intelligence system to a Southeast Asian national coastguard, which also includes long-term multi-year support components. The project is being financed by an inter-government loan between UK Export Finance and the country in question. Finalising the documentation has been a drawn-out process, completely outside SRT’s control, and has pushed back the contract start date. However, the first milestones, worth around £45m, and significant associated revenues and cash collection via the project loan mechanism should now fall into the current financial year to 30 June 2025.

Improving contract momentum

In addition, SRT should book £9mn of milestones on the second phase (gross value of £12.5mn) of a Middle East Border Agency contract in the current financial year, too. The start date of the second phase was delayed due to a combination of the customer amending the exact scope of the project on several occasions, along with the required redrafting and internal verification of formal project documentation. The third phase of the contract, worth £11.5mn, should start in 2025.

In an investor call on 30 September 2024, SRT’s management highlighted ongoing positive momentum across the business, so the latest awards are a clear vindication of their confidence. Moreover, they highlight other contracts at an advanced stage in the company’s $1.5bn validated sales pipeline, so there is scope for further positive newsflow in the coming months.

True, the aforementioned project delays mean that SRT will only report annual revenue of around £14mn (mainly from its transceiver business) and a disappointing loss in the financial year to 30 June 2024. Analysts at house broker Cavendish are awaiting further details on project implementation periods and revenue guidance before releasing their updated estimates, so forecasts for both the 2024 and 2025 financial years are currently under review.

However, it’s reasonable to assume that SRT should be able to deliver a pre-tax profit margin of 10 per cent on revenue once both the two huge contracts are up and running. It’s not beyond the realms of possibility that SRT could deliver £75mn of revenue in the 2024-25 financial year, of which £15mn would be derived from its transceiver business. Expect updated guidance from management when SRT releases its 2024 annual results in the coming weeks.

Importantly, SRT completed an equity cash raise of £10.5mn at 35p a share in January 2024. It placed the £100mn market capitalisation company on a strong cash footing to withstand the variances that come with its strategy of becoming a large global maritime systems business. In addition, SRT retains an undrawn capacity of £16.7mn on a secured loan note programme at the recent 2024 financial year-end.

Volatile share price

Shares in SRT have been incredibly volatile since I last rated them a buy at 38.5p (‘Get on board for a profitable voyage’, 20 November 2023). Projects delays are only one of the reasons why.

The other being that a complaint was filed earlier this year against the company, chief executive Simon Tucker and chief finance officer Richard Hurd in the Philippines in relation to the award of a fisheries management contract. The board’s position is that the complaint is entirely baseless and without merit and it has been fully co-operating with the due process. The complaint against both Hurd and the company has now been formally dismissed by the Ombudsman and I would anticipate the same outcome for the one against Tucker in due course.

So, with the Aim-traded shares rising 25 per cent to 45p following today’s announcement, I rate them a firm hold at the current level ahead of the next trading update at the annual results. However, I see upgrade potential if earnings guidance for the 2024-25 financial year is better than I anticipate. Hold.

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