Investing in penny stocks usually carries quite a bit of risk. That’s because these usually fledgling companies are often financially weak, with fairly limited resources and unproven business models.
However, there are exceptions, and I think SRT Marine Systems (LSE: SRT) could turn out to be one. Now at 47p, the penny stock has risen around 70% in one year, giving the company a market value of £91m.
What the company does
SRT Marine Systems is a global leader in maritime domain awareness technologies, products and systems. What does that mean? Well, put simply, the company sells technology that helps vessels understand what is going on around them at sea. It also makes systems that support authorities in understanding what is happening at sea, so they can better manage traffic, threats and risks.
This is a growth market due to the ongoing global adoption of the automatic identification system (AIS), a tracking system that transmits a ship’s position, identity, course and speed. This network technology enables the precise identification and monitoring of all marine traffic.
It essentially brings the seas and waterways in line with what has become the norm in air traffic control. Yet it is still early days, with management estimating that only about 500,000 vessels out of 26m currently have an AIS device.
Therefore, the firm’s total addressable market appears very large, and includes the world’s millions of buoys, as well as thousands of ports and coast guard authorities. The stock is an interesting play on the long-term digitisation of the global maritime surveillance industry.
Rapid growth
The company operates two business segments. It has its transceivers division, where notable customers include Trinity House (lighthouses), the Royal National Lifeboat Institution (RNLI), and the United States Coast Guard. In its latest annual report (for the year ended 31 March), this unit reported year-on-year growth of 60%, with turnover of £12.1m.
Meanwhile, its systems business generated revenue of £18.4m. Clients here include the Panama Canal and the Bahrain Coast Guard.
Annual group revenue then was £30.5m, representing growth of 273%. Its gross profit margin increased to 36% from 33%, allowing a small post-tax profit of £0.1m, up from a £5.8m loss in FY 2022.
Encouragingly, the forward systems order book is up to £160m, and the new pipeline contains prospects at various stages of the sales cycle, with an aggregate value of £1.4bn. So there’s a strong possibility of new contracts being announced over the coming months.
Attractive valuation
One risk here is that the firm doesn’t have a reliable track record of profitability. It has spent many years investing in its technology and products, but growth was held back by the pandemic. It completed an equity raise of £5.4m last year, but further shareholder dilution cannot be ruled out.
That said, analysts forecast that group revenue this fiscal year will rise 232% to £70.9m, with a profit of £7.4m and earnings per share (EPS) of 3.80p. Next year (FY 2025), sales are projected to hit £105m, with £11.5m in profits and EPS of 6.10p.
This puts the stock on forward P/E multiples of 12.5 and 7.7 respectively. For a growth company with such a substantial market opportunity, I’d say this is dirt cheap. So I’m excited to add the shares to my ISA.
