I think it’s fair to say that SRT Marine Systems (LSE: SRT) has proven to be a hidden gem for savvy investors who bought a year ago. It’s doubled in that time and exploded 30% higher in the FTSE AIM All-Share Index today (27 March).
In fact, since bottoming out as a 19p penny stock in May, it has jumped 200%! This gives the company a market cap of £149m, meaning its still a relative stickleback within the overall UK stock market.
Should I buy this small-cap stock? Let’s explore.
On the crest of a wave
SRT makes advanced maritime surveillance and navigation transceivers. Its systems are used by coast guards, fisheries, and national agencies to improve maritime security, environmental protection, and regulatory compliance.
The share price has been boosted by a steady flow of new contract wins. In October, it secured a $213m contract with the Kuwait Ministry of Interior to provide an advanced maritime surveillance system over 12 years.
For context, SRT generated revenue of £8m in its 2022 financial year. So this was clearly a transformational deal for the firm.
Then in December, it signed a 10-year contract worth $9m with an existing Middle East coast guard client, followed by the commencement of the second phase of a project with an undisclosed nation’s coast guard, valued at $15m.
Why has the stock just surged 30%?
Today, the firm just released its half-year report for the six months to the end of December, and it was incredibly strong.
Revenue skyrocketed to £26.2m, up from £5.5m, and the gross profit margin improved to 46%, up from 37%. And SRT swung from a £4.6m loss in the same period last year to a pre-tax profit of £2.8m.
Meanwhile, its high-growth systems business now has £320m of active projects, all of which are scheduled for implementation over the next two years. Some have ongoing data and support contract periods of five to 10 years, providing long-term recurring revenue.
Chair Kevin Finn commented: “The future of our systems business is increasingly bright, driven by a long-term global trend of sovereigns wanting to digitise and dramatically enhance their understanding, oversight and management of their marine domains.”
Massive pipeline
Back in September 2023, I wrote that SRT’s “total addressable market appears very large…The stock is an interesting play on the long-term digitisation of the global maritime surveillance industry“.
I still think this. However, I sold my SRT shares in 2024 to invest in Windward (another maritime tech firm). I didn’t want to own both. But Windward was recently snapped up at a sizeable premium to what I paid.
SRT’s update was very encouraging, but multi-year projects in emerging markets carry execution and delivery risks. Political shifts in client countries could impact payments, while the business is still barely profitable.
Also, based on last year’s revenue of £14.8m, the price-to-sales ratio is around 10. That’s pricey. However, I’m reading speculation that full-year revenue could now reach more than £80m. That would roughly be a 450% year-on year increase and make the valuation appear more attractive.
Looking ahead, the company sees a pipeline of opportunities from existing and new customers worth up to £1.2bn. This means the stock could still be a gem and I’m considering adding it back into my portfolio.
This post was originally published on Motley Fool
