LTBH, JDG and other stuff

20th Jul '16 by kalkanite

31 comments 15136 reads

I sold out of JDG this morning (20/7/2016) after a profit warning in their interim results to end of June. It seems that despite several “quality looking” acquisitions over the last 18 months, JDG will be heading for lower EPS than it had 2 years ago.

I first bought JDG in January 2011 at a price of £4.35 and have held the shares since, buying and selling at various points that I considered opportunistic at those times but essentially always maintaining a decent level of holding. I watched the share price climb to a high of £23.75 in 2014, however, knowing that the price had got ahead of itself I did not sell out as I was sure that once you have found a great company with great management as Warren Buffet would say the best holding period is forever.

The LTBH strategy is regarded as a noble art form in the world of investing, we tend to regard those private investors that don't follow this strategy as perhaps less experienced. I admire the likes of Lord Lee and David Stredder, very experienced investors who seem to have an ability to pick shares that they hold and maintain that holding for a very long time. Warren Buffet who I study and respect has become one of the richest persons in the world whilst following this strategy.

My longest holding in my portfolio has now become Zytronic which I have held since April 2015 a mere 16 months despite the fact that I have been investing seriously since January 2010. Part of the problem of maintaining a LTBH strategy is that I follow a very focused portfolio strategy, quite simply I am bloody good at saying no to potential investments, if I was to sum up my philosophy in just a few words it would be:

Work within my own circle of competence
Keep it simple
Wait for the perfect pitch

Sound familiar? I make no apologies for plagiarising the worlds best investor, in fact my favourite investment is the “heads I win, tails I don't lose much” investment described in Mohnish Pabrai's excellent book “The Dhando Investor” which is highly recommended reading if you haven't already done so. Mohnish describes himself as a clone of Warren Buffet and is a very succesful investor himself.

Heads I…

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VegPatch

21st Jul '16

Kalkanite
Some very interesting thoughts there, most of which I very much agreed with.
Re SRT - without going into the finer detail of the contracts, SRT has 44 employees to deliver the £70m forward order book. This compares to record revs of £10m in FY16. Ie it's very big as you have correctly pointed out. Given the delays many companies have in ramping large scale projects, how do you get comfort around Cig's point, which I feel does have some validity.
Did anyone go to the investor day on 5th July?

Not really in my circle of competence but i am intrigued and nervous...very interesting!

Brilliant Leader

Jane, your post said Turkey when I first looked and now Philippines :-) It's actually Indonesia, although I believe Philippines is part of their sales pipeline.

cig, I'm not sure I'd label Maritime Security as a low priority problem, especially in the South China Sea.

2015/16 (31st March year end) revenue was £10m, market cap is circa £65m, operating margin was 48%. A couple of months back when full year results were published, Paul posted that he thought the price had got ahead of itself (c'mon the forward PER is only 178), so you are not alone in questioning the value proposition with SRT. He also published an interview with the CEO which I found most useful in filling a couple of gaps in my own research.

In the absence of additional contracts during the next three months, the next opportunity to assess value will be in October when the interims are released. I think those numbers might surprise one or two observers but let's see.

I can't speak for kalkanite but my intended holding period for SRT is around 3 years and I purchased the bulk of my shares in the 30-35p range.

Historically, SRT sales have been unpredictable (selling via a distributor network) and they have often fallen short of expectations. The contract in March signalled a new direction for the company as a specialist systems integrator which is a completely different business model from previously. It's definitely not a one-way bet. It could prove to be another false dawn. There could be delays/problems with executing the $100m contract. Or, they could prove to be an outstanding investment...

EDIT - vegpatch, SRT are in effect the project manager/lead vendor. A lot of the work will be outsourced, which is quite common in the software industry.

janebolacha

CC, yes, I had remembered this contract described previously as being for "a country with a large coastline in Asia". Knowing that SRT had had business previously in Turkey, I jumped ahead of myself and (being a words person and used to precise meaning, sorry!) made the connection to Turkey before seeing that the country was now described as, in fact, "a large country IN Asia", not the way that Turkey allows itself to be described!

Indonesia is, however, like Philippines, also a country where contracts very often slip over time, sites or infrastructure not ready, documentation sclerosis, etc, etc. I wouldn't expect the contract to run smoothly, tbh, from the customer side.

Jane, there will definitely be bumps in the road as is the nature of large IT projects, especially as the bulk of the earnings from the Indonesia contract are back-end loaded (it is a 3 phase contract). The issue of site readiness, infrastructure issues etc. are a very real part of the challenge with these contracts, some of which also lead to delays in the contracts being signed. If you haven't listened to it yet, here is the link to an audio interview Paul conducted with the CEO post full year results:

http://qualitysmallcaps.co.uk/ceo-or-fd-interviews/software-radio-tech-srt-ceo-interview-6-jun-2016/

CC, thank you.

Interesting interview, I must have missed it when Paul published it.

I hope it does work out for SRT Marine Systems (LON:SRT) and for Simon Tucker, the CEO and the driver of this business. He is obviously very committed, besides being exemplary in his approach to shareholder and investor relations.

Perhaps other markets will open up in SE Asia. I can see Philippines as being the next target, then perhaps Malaysia and Thailand, possibly Vietnam. They all have similar concerns regarding piracy and territorial encroachment.

cig

The low hanging fruits in developing countries when it comes to improving standards of living or saving lives is getting the basics right (healthcare, education, basic infrastructure, etc). Security, maritime or otherwise, is indeed relative luxury.

If the generals have more bargaining power than the health minister, the project may well go ahead. For an investor, it's a question of estimating that risk, as well as the other ways such projects can fail to match expectations.

Rusty2

I certainly agree with you about contracts in the Philippines and they have a similar legal system to the USA so everyone seems to be suing everyone else, I remember the fiasco with the new Intl. airport terminal in Manila which was delayed by about 7 years because of contract and legal problems. Not sure if Indonesia is similar or not.

Philipines has over 7,000 islands and Indonesia has over 13,000 islands. There is plenty of piracy in that area and also the Malacca straits are notorious for it. So plenty of demand in that area.

kalkanite

Hi Jane, VegPatch

I don't understand Cigs point re opaque multinational structure maybe he is referring to the Swiss partner that they worked with in Bahrain? They are the builders of the infrastructure and utilities etc. SRT install their equipment once this has been completed.

Cig said …
going according to plan would probably be a first in the history of mankind. I rate the probability of having at least a delay (the announcement of which may do wonders to SRT's share price) at circa 99%. Sorry but that doesn't deserve a reply its just a wild opinion.

With regards to low priority problem some of these countries fisheries industry are up to 10% of their GDP (estimated 20% of global seafood catch to be illegal) whilst China is building and militarising artificial islands within disputed territory. Just recently the Hague tribunal rejected China's claim on some of the Philippines territory, so this is extremely important to their national protection and GDP.

At the recent AGM their was enough info on the new contract to know that it is indeed Indonesia. At the time of the announcement it was said to be “one of the largest projects in the pipeline” it was previously added to the VSOP at a much smaller value so don,t be surprised if the £200m estimate is a cautious one, ST has been a bit hasty in the pass when forecasting projects and has thus become much more cautious. However timing is the real issue here, there are many stake holders in each of these countries so it can and does take years before putting pen to contract, indeed many of the VSOP projects have been going for years but there is a real sense of importance about countries protecting their economic zones and territories.

When we entered the room for the AGM, on each seat stood a jar of jam labelled SRT referring to all the jam tomorrow comments that the company had quite rightly deserved prior to the Indonesia contract. The body language from the management team was very positive and ST said to wait for the next webcast before opening the jam, a very bold and optimistic thing to say and suggests that they believe further contracts are imminent, time will tell.

Bahrain are very pleased and proud of their new Maritime Domain Management system inviting stakeholders from other nations to see it. Now that they have this system in place it is expected that more revenues will follow with the desire for more gizmos such as Aid to Navigation (AtoN) for the buoys and waterway infrastructure. SRT have a proven complete system that is there for the world to see.

They have just recruited 2 new project managers whom I spoke to at the AGM, they interviewed for just one position but found 2 credible candidates and decided to employ both rather than go through the same process a little further down the road. They have expanded their in country installation and maintenance partners which from memory (so take as a pinch of salt :-)) will enable them to carry out up to 8 projects at a time, we shall see.

The equipment is modular plug ins that are set up at their Somerset base and then shipped and installed, so easy to setup once the infrastructure is built.

Overheads are circa £5m - £6m per year and not expected to rise much from here, with gross profits of 50%, after the first £11m revenue 50% of any revenue above this will find its way to the pre tax profit line. The projects are self funding so no need for borrowings/equity dilution.

All this and with a current contract that underpins the current share price. I see it as “heads I win, tails I don't lose much” but that's just me, if anyone takes the time to read the AGM presentation and Simon Tucker's last web cast they can get a good idea of the prospects at SRT.

K

Edit, AGM presentation and webcasts can be found here.......

http://www.softwarerad.com/media-centre/

Re time slippage, Simon also said at the AGM that phase 3 of the $100m Indonesia project was being brought forward so another positive there, again time will tell

Thanks Kalkanite, great detail. Helped me to get a sense of where management are coming from eg Jam on seats.
Admittedly the opportunity does sound big.

However I wouldn't be too harsh on Cig - the general sentiment behind what he saying is probably not a million miles away from the truth and any company with 1) a history of jam tomorrow and 2) trading on 178x PE CANT AFFORD any delays.

Has anyone checked the revenue recognition policy / debtors? Isoft always looms large in my head re contract accounting for software / hardware companies

shipoffrogs

Vegpatch
SRT's business model has recently changed. It has been a seller of bits of kit - with a straightforward revenue recognition policy. But now the excitement is around the selling of "air traffic control systems for boats" - where revenue recognition is likely more complicated - but this will show up in future accounts. Paying attention to cash flow will be a better indicator going forward.

thx, noted

PJ0077

23rd Jul '16

Kalkanite

Thanks for the links SRT Marine Systems links, I watched the recent webcast with interest.

A key question for me is the nature of the company's revenues? Are these revenues mainly project (one-off) related, or is there a high degree of recurring licence, service or maintenance-type revenues? What percentage of revenues would you say are recurring year to year? It's not clear from the AGM powerpoint presentation.

Thanks

Pj

currently SRT are selling kit and projects - one offs. But looking forward there may be recurring revenue coming in from the data collected, including that from satellites (ABSEA) - but there's no way of determining how significant this could be at the moment. I'm guessing it's real value would lie in using it for fishery protection purposes and perhaps spotting nefarious activities at sea.

24th Jul '16

Cheers shipoffrogs, much appreciated.

I guess the key to valuing this company is in estimating the degree of customer 'lock-in' ie the degree to which customers will rely on SRT for software updates, maintenance etc as opposed to using a 3rd party. An interesting company indeed.

Hi PJ

As SOF said, the recurring revenue potential will come from the ABSEA enabled AIS class B products. All new class B products are now satellite enabled with their partner Exact Earth, they are also Wi-Fi enabled though Simon Tucker said at the AGM that more software development is needed before this can be effectively used as a source of income.

Originally it was thought that boats would pay circa $10/ month to be satellite enabled, but this would need to be government mandated as boat owners would otherwise not be interested. At the AGM he said that $10 too little and more likely to be $20/month so absolutely massive potential there but at the moment it is just "potential". Absea is vital if countries want to identify boats that are more than say 30 miles from coast line, if you look at the Ecuador project which is expected to come to fruition shortly, there boats fish up to around 150 miles off shore. The countries that are in the late stage project development have tens of thousands of fishing boats alone. However IIRC, India has shown a preference to the higher powered 20W class B identifiers which can possibly be identified by Indian state satellites so there is no guarantee that Absea will create huge recurring revenues.

SRTs cut of the revenue is 30 or 33% but they can buy data from EE and sell directly, something that I believe is planned for Ecuador so the profits can be even larger.

Absea allows national maritime managers to be able to tell who the good/bad guys are that are using their waters, this makes using their limited security vessels much more economical so the potential of Absea should not be underestimated despite not being able to predict the take up of this.

K

Much appreciated K

You've clearly done a thorough due diligence on this business!

PJ

9th Aug '16

I'm still considering SRT Marine Systems (LON:SRT), I note the share is down below 50p now, is this to do with the share option that were announced yesterday, they do look rather generous considering the amount of profit. Any opinions on this?

Hi Herbie

The share price had quite a run lately, I think it has finally succumbed to some profit taking for now.

Yesterdays grant of share options was a bit naïve/bizarre as the first tranche vests straight away due to the target price (50p) already being attained, I think the rise in share price caught them off guard. This has understandably upset quite a few investors on the ADVFN thread, it appears that the scheme had been passed 6 months ago but was left until now to be announced!

Personally while the timing is very poor I don't have a problem with the reward. Management has worked very hard to get what is “potentially” a world class business where they are now, their pay is fairly modest so deserve the incentive. There is however some suggestions that management may have talked the price up (RHPS gave a bullish write up over the weekend) to keep the shares levitated, I personally don't believe that to be true but thought I should mention it for the sake of balance.

The current share price is underpinned by the contract announced in March of this year, given the scepticism of the share options announced yesterday, I suspect that we will need another contract announcement before the shares will rise significantly from here. Timing of the contracts are very difficult to predict, it could be tomorrow or 2017 so anyone thinking of investing now needs to have a minimum 18 month time horizon.

The spotlight is now on management at SRT to perform, I attended the AGM last month and have to say that they were very bullish about current prospects. The next 2 tranches are set to mature at a share price of 75p and 125p, if they hit this over the next 12 months we can all be very happy. AIMHO

K

10th Aug '16

Hi kalkanite, many thanks for that information.

LTBH, JDG and other stuff

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Kalkanite

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