It was just over a year ago that I last took a here at Shearwater (SWG), the shares then standing at 45p.
At that time, I was showing a small profit on my investment after buying in on what I viewed as a discounted recovery play.
Indeed, the shares trotted up to 52p at one point on an apparent progression, before slumping back again on a failure to hit the projected numbers.
Since then, it has continued to be something of a frustrating time on the investment front here, with the shares proving to be decidedly unloved and now residing in the mid-high 30’s range.
That said, I have recently added to my position at circa 35p, as I continue to believe that the current valuation is something of an anomaly, given the solid net cash position, no debt and the recovery potential for the business.
Admittedly, a turnaround here appears to be a long time coming and whilst value trap also springs to mind, recent contract wins have been impressive, just as the pipeline of real and potentially major opportunities remain solid.
As a reminder for those already familiar with, or an introduction for those not so versed with the business, SWG is a cybersecurity, advisory and managed security services company operating across a vast and often fragmented space.
The company's various arms include software, where it has its own IP, along with a much larger services arm that takes in the selling of third-party products.
Although much smaller, the software element sees SWG designing and building its own offerings to help clients secure and assist in making their corporate environments compliant in an increasingly technically demanding arena.
Customers are impressive, such as blue-chip Tier1 banks and telcos, along with numerous others, which more recently includes government departments.
Over the years, the business has made specific acquisitions to support organic growth, that fits with a buy-build model designed to expand, whilst developing and increasing synergies and reach.
For some background on this, in 2018 SWG stumped up some £30.3 million for Brookcourt solutions, which followed on from the significant £20m purchase made a year earlier for SecurEnvoy, whilst more recently, specific assets were also added for a £7m sum.
Today, despite those hefty acquisitions, the market cap of SWG stands at just £8.6m, which given that there is no debt on the balance sheet and that decent net cash figure which is expected to stand at circa £6.8m by the current financial year end, the suggestion is that there is currently next to nothing being ascribed to the business itself.
Of course, SWG has hardly covered itself in glory over recent years, having had to warn the market on more than occasion, which has understandably turned investors off.
Clearly, at the end of the day revenue may be one thing, but recognisable profit and cash generation is something else and ultimately determines sentiment and the direction of the share price.
As I mentioned in my previous piece on the company, SWG does have the potential to deliver on numbers, as was seen back in 2021 and 2022 when adjusted pre-tax profits of £2.4m and £3m.
That saw adjusted EPS of 10.6p and 10.3p delivered in financial years 2021 and 2022, which during the period also resulted in the shares hitting a high of £2.15p.
Having recently released its Interim Results to the market, Broker Cavendish is now looking for a return to profit for full year 2025, with an adjusted PBT figure of £0.6m pencilled in on revenue of £27.6m.
Net cash is also expected to make further improvement with a substantially significant £6.8m number being forecast in the Broker’s note, that also points to an impressive free cash yield of 21% being delivered.
If these numbers are on track and ultimately proven, then one would surely be right in assuming that the shares should rerate and perhaps pave the way for a more sustained recovery, particularly given the space in which it operates is not only currently hot, but likely to gather further momentum and traction.
However, investors or watchers are absolutely right to be sceptical, given that the company has failed to deliver previously and as a part of that, it is often hampered by an element of lumpy revenues.
In order to hear more on the Interim Results along with the all- important current picture and the ability to deliver on those market expectations for the full year, I have once more caught up with management.
CEO Phil Higgins, alongside the more recently appointed CFO Jonathan Hall were on hand to fill me in on the business, along with answering some of my own questions and concerns that may resonate with other investors.
Higgins sounded a note of frustration to echo that of investors regarding the share price performance, which retraced on the day of the Interim Results release which had been accompanied by a substantial contract win announcement of $12.8m over a five-year period with a leading global telecommunications company.
Firstly though, the CEO addressed the reduction in the EBITDA numbers for the period against the prior year, explaining that they had taken the decision to accept a deal that was actually below their normal EBITDA level.
“We did that for a purpose” he explained, “as we took a multimillion-dollar deal which enabled us to then penetrate deep into a particular account.” The result of that Higgins added, was that it meant another deal from that end that came through was concluded at a much higher margin.
And the overall outcome of that I was told has been to position SWG very favourably in what is an extremely large media company.
Speaking of the significant $12.8m deal that was announced to the market alongside the Interim Results, Higgins said that it was actually only signed off the day before the results release, which meant that the announcement was subsequently rewritten prior to release in order to accommodate that win.
“That particular win is a multi-year deal that is over five years, of which we will take about three and a half million this fiscal year with the rest being rolled out in years two to five.”
In terms of timing to win and conclude such a major deal, Higgins added that the conversations started in April to May of this year, progressing throughout the summer that led to a verbal confirmation in late August.
As a result, they were expecting the paperwork to be concluded with the deal landing in H1, which didn’t quite work out.
Such protracted timelines, particularly on the multi-million dollar deals understandably take time to sign off and Higgins spelt out that it can usually involve a number of signatures in order to fully close off.
Importantly, the deal in question is with a new customer and appears to a be a strategically sound one too, where I was told that SWG now has all of the Telco’s on board.
Although UK based, SWG has a global reach which includes a distinct client list that takes in FTSE 350 AND Fortune 500 companies spread across some fifty countries worldwide.
Its software and services, Higgins said, are very much specialised and far away from the run of the mill general security, hence its being aligned to major players as a trusted partner where there can often be high barriers to entry. It also enjoys strong margins, suggesting that additional wins and growth could prove highly rewarding.
One aspect that is currently playing to the company's strengths and providing for further opportunities is the area of increased regulations, particularly across banking and this is an area of ongoing activity.
More recently and interestingly though, SWG has won contracts with government departments that Higgins says has seen SWG move through stage one and where they are now being invited for further opportunities.
“Some of those are competitive and sometimes we aren’t the only one in the room, but we have a good track record and we are already in there with the government and seeing large contracts.
We took the strategic approach to go after government business back in 2023, but before that it was just too clunky, not enough money and also slow, but the Government got themselves sorted out and organised. That meant that we could then go in there and we won a sizable piece of business with a big department, which is all around the dark web and all the noise where things like ID’s have been stolen.”
Higgins also went on to say that when you consider the sheer number of government departments it is understandable that this is an area that they are very keen to now focus upon.
As for what SWG is selling into the government, the CEO told me that this includes their own IP alongside a reseller element, where he expanded. “We have put in circa thirty-two solutions, some of which were exclusive and that includes our own SecurEnvoy software and also some consulting in there too.”
Selling into Government also provides for a good reference point alongside the offerings into high street banks alongside the established telco space.
Despite what looks like a promising picture for the full year outcome, I was nevertheless keen to hear on just what level of confidence currently prevails for that delivery.
Higgins explained that the H2 can be heavy due to the fiscal year- end of customers such as banks and telcos who have to spend their budgets or ultimately lose them, so this often provides for a late spike on the revenue front.
More importantly from an investor perspective, he added that they have good visibility on what is coming through for the fiscal year end and a pathway to delivering on the market numbers.
“There are always going to be headwinds” added Higgins, “and there is always pressure on spend, but there are also some must have contracts that have just got to happen, either due to compliance or security issues”.
This leads to what is described as a cautiously optimistic stance going forward, where Higgins also said that they were in a better place than they were this time last year and that he is mindful in relation to the importance of delivering on news flow.
That arguably suggests the company will be keen to release further contract news as it emerges on the back of various initiatives that have been applied and implemented across the business.
Looking at the Cavendish note, there is a forecast uplift in net cash that I was also keen to explore, particularly in the context of it’s making up for a large amount of the current market cap.
CFO Hall, commented, “what we can say with a reasonable degree of confidence is that we will have very positive cash growth in H2.
It is difficult to predict exactly where the balance will be, due to some large and lumpy contracts, such as an example of an £8m renewal contract that is in the pipeline.”
This, I am told, although not guaranteed, is a deal that they have done before and is due around February to March time, which provides for a glimpse of the timelines and further potential for significant wins.
To conclude, Hall added that they were feeling pretty bullish on the delivery of the revenue number out in the market, along with the increased cash and good EBITDA profit in H2.
At present, shares in SWG remain subdued and it may take a run of positive contract news and a results delivery to really provide for a return of investor confidence and some serious share price upside.
However, in the meantime, it is clear that SWG could find itself the subject of unwanted attention, particularly given its lowly rating.
Or, it must also be conceivable that taking the business private as others on the AIM have elected to do, could also be considered, which wouldn’t be good for investors.
On these subjects, Higgins is happy to engage, particularly as he himself sits as a major investor in the company with an 11% holding.
“Obviously I am restricted on what I can or can’t say on this, but we do have regular board meetings, where we review and discuss all of the options.”
He added that they do get people knocking on door, where some are bottom feeders looking for a cheap deal, but added that where there is a serious situation of someone knocking on the door with merit, they do actually discuss it as a board.
On the back of that, the CEO was clear to stress that shareholder’s interests are paramount and that if the numbers were right, then he felt sure there would be a vote on it and an announcement would duly be forthcoming.
On the subject of going private, he said that whilst it is an option, what would it offer shareholders whose interests are key, suggesting to this investor that it isn’t something likely to be on the table.
Even though the AIM isn’t a great place to be at present for many companies, Higgins nevertheless believes that SWG does have real potential and within that, acquisitions also continue to remain on the agenda.
The plan is to seize on the opportunities that are both there and increasing along with demonstrating to investors that SWG can now go on to deliver.
If the company can achieve that on a couple of fronts for the full year 2025, then the shares should respond accordingly and move in the right direction, which could open the door for further progress next year.
That said, given recent activity on the AIM with undervalued situations, it must surely be a possibility that somebody could well come knocking with an offer that may just prove attractive enough to put forward to shareholders.
I hope to catch up again with management in the New Year, for further discussion and comment.
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