| Software Radio Technology is worth tuning into by James Faulkner of WatsHot.com On specialist small cap website Watshot.com, editor James Faulkner provides two hot new recommendations each month, regular updates on his share tips, investment ideas, rumours, book reviews and his daily thoughts and insights into the markets. To access James' tips and much much more... And here is why James thinks Software Radio Technolgy is an attractive stock... Software Radio Technology is a world leader in the provision of advanced wireless digital technology solutions for the marine sector, specialising in identification, safety and tracking. SRT's products utilise over 20 years of R&D into radio-based wireless technologies, and its established distribution network gives it access to all the key international markets. The shares have been on the back foot of late due to order setbacks and forecast volatility. However, the global opportunity for SRT's products looks undiminished and value is beginning to emerge at current levels. Dominant market position... SRT has approximately 20 customers serving its mandated market of Marine Identification & Tracking. AIS (Automatic Identification System) is an international technology standard, developed and maintained by the IEC (International Electrotechnical Commission). First mandated in 2002 by the IMO (International Maritime Organisation) for use on larger vessels (those with a gross tonnage of over 300 GT), AIS has become the technology of choice for vessel operators and national authorities for accurate identification and tracking of vessels. AIS uses a combination of radio and GPS technologies to accurately identify and track vessels of all sizes, and must be completely reliable in all conditions. Through its subsidiary, SRT Marine Technology Limited, SRT leads the world in the development and supply of AIS technologies and solutions, with a market share estimated by the company at around 80%. The firm offers two types of AIS as either a module or chipset board; Class A or Class B. It has also recently developed a low power version for lighter vessels such as fishing boats. Meanwhile, SRT has approximately 40 customers serving its core, non-mandated market. Communication systems for key personnel such as military, police, ambulance, transport and other professions must be totally reliable at all times often with a complex mixture of data and voice applications. TETRA (Terrestrial Trunked Radio) has become the most widely used professional digital communications standard, with over 100 countries rolling out networks. SRT offers a complete, proven and approved radio handset and modem source technology solution. SRT outsources its manufacturing processes; its core expertise lies in the development of complex AIS communications and data management software. This IP-based model gives it a very scalable business platform with high margins and a high level of operational gearing.
In a market underpinned by regulatory pressures... One of the key attractions of SRT is that its markets are regulatory-driven, giving them some degree of downside protection. However, it should be noted that there is no over-arching global authority here, and the regulatory environment is relatively fragmented. That said, AIS is becoming increasingly recognised internationally and the market is moving in the right direction. The IMO has established mandatory carriage requirements for approved AIS equipment under the Safety of Life at Sea (SOLAS) Convention. Broker Arbuthnot estimates that mandates impacting over 1 million vessels across the markets of China, Korea India, Turkey, the US and the EU are either underway or pending. Meanwhile, there are also further opportunities available for SRT in areas that are not subject to the SOLAS convention. These include inland waterways (such as the EU mandate mentioned above), which carry a significant volume of commercial maritime traffic, while a number of country- and region-specific mandates have even been introduced to cover non-commercial vessels. While these individual mandates vary considerably in terms of size and timing, I note that China has a mandate pending for 2015 that is estimated to impact some 550,000 non-SOLAS units, representing a huge long-term opportunity for SRT. Despite the strong regulatory factors, the fragmented nature of the market has resulted in lumpy order patterns driving forecast downgrades and a consequent c.50% fall in the share price over the past year. In March the firm warned that results would be behind expectations due to a delay in orders due to a shift in expected demand derived from EU mandates, from the final quarter of FY2012 to the second half of FY2013. However, despite this the customer base increased by an impressive 50% over the year, from 40 to 60 customers. "As such the Board view this as a timing issue and not a market or sales trend." Indeed, recent news added weight to this assumption when the company announced a £2.4 million order for its Identifier device, with scope for the client to increase the order by a further £10 million over the next three years. Management estimates the total potential pipeline of mandated opportunities for SRT amounts to c.£26 million during the course of 2012/13. With this in mind, it appears that the market may be taking an overly pessimistic view of the firm's prospects, notwithstanding recent disappointments. SRT's confidence in its growth prospects were sufficient to merit a doubling of its product development budget to more than £2 million in FY2012, enabling it to boast that by the end of FY2013 it will have "a complete range of new products addressing all segments of [its] global target market". Already in production are the latest Class A, Class B, dual-mode and Identifier devices, with the Search and Rescue Transponder (SART) and Aids to Navigation (AtoN) devices due to enter production by the end of the year. Broker Daniel Stewart (the only broker brave enough to offer forecasts beyond the current financial year) estimates a pre-tax profit of £1.9 million on revenues of £10 million during the current year to March 2013, rising to £5.1 million and £17.6 million respectively for FY2014. At the current price of 20.5p, the shares trade on a prospective P/E of 15.8x falling to 5.7x. Should further order confirmations provide a better picture of future earnings visibility, the single-digit FY2014 multiple could begin to look out of step. JAMES WILL BE PUBLISHING HIS LATEST HOT TIPS NEXT WEEK. CLICK HERE TO JOIN WATSHOT.COM NOW
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