SRT Marine Systems

Is SRT Marine Systems PLC really worth your attention?

What to make of SRT interim results and is this a good investment to make?

 

Half-year Report

Share Price: £0.35 (up 0.72%)

Market Capitalisation: £44.7m.

 

SRT interim results are unspectacular as losses before tax and exceptional rose to £1.8 million from (2016: loss of £1.2 million). Even though revenue grew by 10%.

Including exceptional items, then loss before tax increase to £3.26m. The exceptional item totals £1.5m and arose due to a delay in a project. And details of this delay are explained below:

we were officially informed by the government entity in question, that a maritime surveillance project for a SE Asia national Coast Guard signed in March 2016, had been delayed significantly due to budget planning constraints.”

But, SRT has reassured investors, the project will still get the go-ahead, but won’t recommence sometime prior to March 2019.

 

Too little information

 

Looking their interim statement, I find this to be confusing:

I am pleased to report that we have seen significant activity across all our validated sales pipeline opportunities which have an aggregate total value of over £200m. Each is a large and complex project, where SRT is engaged directly with the end customer in conjunction with our local partners.

Don’t be think SRT has £200m sales pipeline, but some of this revenue will come from this pipeline. The uncertainty relates to the lack of information regarding the % of the £200m that SRT would get from this pipeline.

 

SRT Balance Sheet and Cash Flow Statement

SRT has recently received a £2m secured loan note, in which the net proceeds came to £1.75m (£250k in fees equal to 12.5% of total value). That has been used up as they paid for product development costs.

The cash balance stands at £2.13m from last year £1.8m.

 

Outlook

Management is optimistic in their business and sees improvements in the second-half, especially from em-trak and OEM/Module businesses. It will contribute in the second half and more regularly thereafter as projects and their individual irregular milestones overlap.

 

 

 

SRT SENIOR LOAN NOTE

SRT has recently received a £10m working facility from  LGB Corporate Finance. It will help SRT to issue secured loan notes in series to meet the Company’s financing requirements flexibly as they arise.

An initial issue of £2 million of secured loan notes has been completed and the proceeds received by SRT. This programme can be enlarged up to £10 million, at the Company’s request.

When it comes to paying back the loan notes, it states:

Each loan note may be repaid at any time within their three-year term with a 0.5% redemption fee and an annualised coupon of 9.5% payable on the outstanding amounts.

 

In theory, SRT could pay £950k in loan note interest per year.  Although I wouldn’t put much confidence in SRT to pay off this loan in three-years because of its lumpy sales and lack consistency in profit generation.

But LGB is benefiting from this arrangement because for the FIRST YEAR of issuing the £2m in notes it received a 12.5% in fee and a 9.5% coupon interest, giving them a 22% return. Then after, SRT pays a 9.5% coupon interest per year, up till the third year.

 

 

 

 

Historical Performance

I don’t know much about SRT technology and how competitive it is against their rivals. But a glance at their historical financial performance tells me a lot.

First, SRT’s turnover is very lumpy and there is no consistency regarding their first or second-half revenue (see below).

 

Chart one: SRT Marine “inconsistent” Sales performance

 SRT Marine Systems LUMPY Sales

You can see in some periods that h1 sales are greater than h2 sales and recently h2 sales have performed better.

 

The problem with having lumpy sales is other costs are rising at a steady pace. Take administration cost, for example, it is seeing a steady increase each year, regardless of how much sales are generated. That put pressure on the company’s margins.

If you were to measure its valuation based on turnover it is at 4.2 times down from their previous peak of 4.6 times.

 

Chart two: SRT Marine Turnover, Admin. Expenses and Price to Turnover

 SRT Marine Systems PLC (SRT) - Turnover, admin. expense and Price to turnover

Moving onto their historical balance sheet.

Starting with stock (aka inventory) to turnover, you can spot the lumpy pattern in stock to % of turnover. When stock to turnover rose, you can tell that orders are either delayed or got cancelled. But when the ratio fell, orders are fulfilled and inventory levels start to decline.

For debtors, as % of turnover, this pattern is true, but the reverse of stock to turnover. Instead of orders getting fulfilled, SRT is now waiting for cash to get received.  And last year that number has spiked to a record 70% of turnover.

 

Chart three: SRT Marine Debtors to Turnover and Stock to Turnover 

 SRT Marine Systems PLC (SRT) - debtors to turnover and stock to turnover

A business operating under these conditions are price takers and is lacking in competitive advantage. This will harm their margins and ability to consistently produce a profit.

Also, profit guidance from SRT is HARD to predict and forecast, this makes the company an uncomfortable investment from a long-term point of view.

 

Putting it together

Personally, it is not an investment for me because of their lumpy sales. But if you are an expert in what SRT sells, then this stock might be for you.

Even then, I feel that ONLY SRT management and a few insiders have a better understanding of how well they will perform in the next 12 months.

 

At a market capitalisation of £44m, their valuation level is too high for the risk involved, so don’t be surprised if the share price was to take a tumble on an announcement.

Also, I am not comfortable with their borrowing arrangement because it looks like LBG is getting the better end of the bargain (see SENIOR LOAN NOTE section from above).

 

I hope management is right about their optimism of their new em-trak and OEM/Module businesses for the sake of holders in this stock.

With all that said, I won’t be making a share price forecast out of respect to current shareholders.

 

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DISCLAIMER

 

The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.  I don’t hold the company’s shares unless stated.