Are we there yet? SRT

Wednesday, Jan 09 2019 by
9

I've been invested in SRT Marine Systems (LON:SRT) for 8 years but it feels more like 16. The company had so much potential when I first bought stock but the early promise of growing sales of AIS transceivers to satisfy national mandates around the world never achieved lift off. "Jam tomorrow" became the familiar jibe of those who doubted SRT would ever make it big. No one has ever doubted Simon Tucker's persistence, eternal optimism and charm but even Paul, who once took a stake, gave up and moved on.

Today, SRT is a completely different company from the one I found back in 2010. Then it was basically a box shifter, trying to sell lots of high-tech tracking devices to boat owners many of whom really didn't want to pay for them. The underlying business model was fine. Design the product to be the best in the market, outsource the manufacture, sign up dealers across the globe who would do most of the marketing and the product would sell. It did sell but not in sufficient numbers to grow the business.

A sea change occurred in October 2013 with the acquisition of GeoVS for £955k. At that time GeoVS which had been spun out of the University of South Wales had 3 employees and had developed a display system that was ready to be sold commercially. Crucially, this software had the ability to fuse data from AIS transceivers, radar and marine maps to create a 3D visual representation of the environment in which vessels were moving.

SRT had seen the potential to exploit the data being generated by countless AIS transponders to create a system through which coastguards, port authorities and fisheries could see what was happening in their field of interest. Now SRT could become a supplier of complete maritime systems not just a supplier of one of the components required to manage the environment. This would be important in a world where fisheries management and countering terrorism were becoming as essential as simply managing the movement of vessels around the coast.

One of the things I always liked about the company was the relentless focus on product development. Gradually, new versions of the basic product architecture appeared. These provided a top of the range transceiver aimed at ocean going vessels, a series of mid range products for smaller commercial and leisure craft and an inexpensive battery powered device intended for small scale fishing boats. In addition SRT developed a top flight Aid To Navigation product (ATON) which operates at a fraction of the power required by competitor devices and capable of transmitting data from a host of weather and tide sensors. Each new product has always had to undergo rigorous testing to comply with international standards of accuracy and performance (unlike some cheap knock off products typically found in the Far East).

Development of the GeoVS system also became a priority, adding functionality and scalability. In time, analytics are added enabling the system operator to pick out what they were looking for amongst the mass of targets on screen. Vessels behaving in an unusual manner perhaps, suggesting illegal fishing or not broadcasting an AIS signal when a radar contact showed their presence. Thus GeoVS became to means by which SRT could demonstrate the ability to know and control what was going on in the waters of interest to a government.

Over time significant sales were achieved in such places as the Panama Canal, the Galapagos Islands, Qatar and Bahrain but none were transformative. The big breakthrough seemed to have arrived in March 2016 with the announcement of a $100m contract to supply a Marine Domain Management system to a large Asian country which turned out to be Indonesia. The following July, SRT was informed that the contract had been postponed and the accounts took an impairment charge of £1.5m for work done but not paid for. No public explanation for the postponement was given but reading between the lines, changes in personnel at the customer end resulted in previously taken decisions being revisited. Once more SRT seemed to be unable to capitalise on its excellent products and clear advantages in its field.

Shareholders were regularly told about a pipeline of validated opportunities totalling several hundreds of millions of revenue and although progress was being made in assisting the end customer to define their requirements, contracts to supply were notable by their absence.

Then in March 2018, a €28.5m contract to supply the Philippines government with a complete system to manage fisheries and the marine environment was won against competition from an incumbent system supplier who just happened to be French. In July, the funding for this project which was to have been provided by the French government by way of an Overseas Development loan was withdrawn. As a result, the project had to be re-tendered to comply with Philippine regulations. New funding was secured directly from the Philippine budget and finally, in early December, a new contract worth around £31m was awarded to SRT.

Today, in a live webcast, Simon Trucker, CEO said that the system in this contract is just the first of what he expects to be several contracts worth around $200m in total over the next few years as the project builds the infrastructure and equips vessels with transponders that can not only be "seen' from shore based stations but also "seen" from satellite when remote from shore. He described how EU inspectors (who check what countries are doing to prevent illegal and unreported fishing) were "amazed by the system" on their visit last month. The system will in due course allow the Philippine government not only to identify vessels which should not be fishing in their waters but also to report each catch to comply with the growing demand for verifiable sourcing of fish exported to Europe and elsewhere. This is no mean feat for a country which has around 400,000 boats.

Simon Tucker also refers to a quite dramatic ripple effect, particularly in Asia that has generated growing interest from countries with similar problems to solve. He also mentioned the likelihood of additional contract awards in the Middle East from two existing customers (Bahrain and Kuwait) looking to expand their systems and one (I assume Saudi Arabia) wanting a new system having carried out trials and extensive surveying of the coastal infrastructure. Here we were told is another $100m worth of business to be won.

Long suffering SRT shareholders are beginning to believe that all the hard work done by SRT to develop products that meet exacting performance and reliability criteria as well as building long term relationships with decision makers in far flung lands is about to pay off. Crucially, what defines SRT's competitive advantage is the ability to supply a complete, reliable, scalable system, within which the data is owned by, collected and stored in the client country at a total cost which is a fraction of competing offerings. This morning's announcement that more staff have been hired to cope with the growing workload reinforces my optimism. Perhaps, this time, SRT has arrived.

web cast recording available at https://srt-marine.com/news/


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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

LSE Price
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Change
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Mkt Cap (£m)
44.4
P/E (fwd)
14.5
Yield (fwd)
n/a



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8 Posts on this Thread show/hide all

extrader 9th Jan 1 of 8

Hi alterego,

Not as long-suffering a shareholder as you, but nevertheless....

Thanks for what seems a very 'unrampy' write-up that accounts succinctly for the SRT back story and why we may be about to turn a corner....and open that damn jam jar (in joke !).

My only observation is that I believe the third ME country is Kuwait, not Qatar (given local politics, the latter may be 'off-limits'...)

ATB

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alterego 9th Jan 2 of 8

In reply to post #434263

Thanks extruder for the correction. My notes say Kuwait so writing Qatar was an aberration. Have edited the original to avoid confusing anyone else.

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extrader 9th Jan 3 of 8

Hi alterego,

Thanks for this ! SRT is obviously - from the lack of other comment on your excellent (confirmation bias anyone ?) article - still below people's radars....

I'm OK with that.

ATB

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cig 10th Jan 4 of 8

Don’t you fear that the Chief Exhuberant Optimist will squander the incoming cash flow (if any) of the current projects on the development of an Intergalactic Spaceship Monitoring System (ISMS) for sale to a distant civilization of dubious creditworthiness?

(More prosaically I have trouble understanding the point of illegal fishing monitoring using AIS, surely the boat owners will wise up to it and switch off, jam or relocate the transponders.)

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alterego 10th Jan 5 of 8

In reply to post #434518

cig, as I mentioned above, it's not just AIS that allows authorities to monitor who is fishing or just present in their waters. Radar can detect a vessel and if it's not transmitting its AIS signal which tells you the identity of the vessel, it raises the suspicion that they are trying to hide. Fusing data from different sources allows more targeted surveillance.
If it really was simple to evade detection by turning off AIS why would anyone want a monitoring system?

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mmarkkj777 10th Jan 6 of 8

I've had a look at the share, as I'm on the lookout for bargains breaking out (aren't we all :-) ).

It seems to me they have a good product and a good market, but they just don't ever seem to make a profit.

The share price is basically half way between its previous highs and its previous lows.  Its debt is more than 3.5 times its assets (with no profit).

So, for me, it would be a flip of a coin punt and the market is too volatile for the risk.  Just my thoughts.

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alterego 15th Jan 7 of 8
1

If anyone is interested in seeing the capabilities of the new system SRT are installing in the Philippines, there's a short video here https://vimeo.com/306772959

Catch reporting is a key component that allows authorities to ensure only permitted vessels are fishing or to enforce quotas and satisfy export markets' need for evidence of the source of imported fish.

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alterego 31st Jan 8 of 8
1

SRT Marine Systems (LON:SRT) have today announced the raising of £4m via a placing at 30p
"to support the delivery of existing contracts, accelerate the development of coast guard specific functionality of its systems and additional working capital."

This reinforces the recent news flow about the imminence of further contract wins and part of the monies raised are intended to pay for the additional staff required to project manage the implementation of these projects. The reference to "coast guard specific functionality" refers to features of the GeoVS software which is central to the monitoring of vessel movements.

Also today, FinnCap have published a broker note which is free to view if you register. See https://researchlibrary.finncap.com/File/View?file=4f444013-7e4f-416b-afc4-cb0711a86d05

Although clearly paid for by SRT, the note provides in depth coverage of the market for MDA systems (Marine Domain Management) and SRT's leading position in it. It also covers in some detail the £31m phase 1 of the Philippine Fisheries project but also several other near term opportunities that would have a material effect on the conservative forecasts currently made.

Regarding these opportunities, FinnCap say:
SRT "is working on a further six contracts, with a mixture of existing and new clients spread between S.E Asia and the Middle East, worth up to £212m moving into final contracting phase, with an additional £200m in the visible pipeline. These are imminent and winnable since most arise from long-standing relationships built up over many years."

These additional contracts would be significant in terms of profitability as the broker note points out
"a 40% gross margin on £212m of project work is £85m, against annual fixed costs of just £7.5m."

SRT shareholders may not be "there yet" but there's a growing sense that everything is moving rapidly forwards.

Disclosure, I hold SRT.

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