As with many other investors, I like to keep a close eye out for potential recovery or turnaround plays, which if caught right, can subsequently prove extremely rewarding.
On a personal level, some months back I bought into Shearwater Group (SWG) when the shares sat in the low forty pence range, adding further after the stock declined southwards into the low thirties.
The company, which consists of a number of different operating businesses, is very much focused on providing and delivering technology solutions and professional advisory services across the cyber, security and areas of corporate regulation.
This would appear to be a positive space in which to trade and grow, which in turn, should really be capable of delivering rewards to shareholders, particularly given that SWG operates across the globe where it serves many high-profile blue-chip customers.
More recently however, things haven’t exactly gone to plan for the business, which saw SWG delivering an unwelcome warning to the market earlier this year regarding its full year 2023 numbers.
The shares, which this time last year were trading around £1.15p inevitably went into freefall as private investors headed for the exit door as confidence evaporated.
That warning, which saw a scaling back on the full year numbers was down to a number of factors, not least delayed contracts being signed, with the bottom line resulting in a big miss on the previously guided forecast.
Whilst some may conclude it is too early in the day to consider SWG as a recovery play, the most recent news has been in a more positive vein with the shares having recently recovered to a current 45p.
Having this morning delivered Interim Results for the period ended September 2023 I have been fortunate enough to catch up with management to hear more on the business, its prospects and the level of confidence moving forward.
Both CEO Phil Higgins and Interim CFO Adam Hurst were on hand to fill me in, where all being well, the latter will become a permanent feature on the board having recently joined.
Given the nature and structure of SWG, the make up of its full year numbers are heavily weighted to the second half, where having delivered revenue of £10.5m leaves it with close to £22m to fulfill in order to deliver the broker revenue forecast of £32.5m.
Whilst this may sound like a big ask and understandably result in investor caution particularly given last year's delays, Higgins sounds a firm note of cautious confidence.
One immediate point to note in relation to this key aspect is that many of the contracts that SWG secures are of significant sums in monetary terms that can run from a few to multimillion figures.
In that context, it doesn’t take too much in the way of conversion to achieve the goals and indeed, recent wins which will be recognised in the full year 2024 numbers typify this.
Those contracts included a leading British Mobile Network Operator, a European Cyber Managed Security Services Provider and also a leading International Health and Beauty Retailer.
Additionally, there was a first win with a significant Government Department which provides for a new and promising avenue for the business.
CEO Higgins tells me that many of SWG’s clients are blue chip businesses where its offering is at the top end of the range and requirements, hence long and well-established relationships.
Although the business has gone through some structural changes that has also incorporated a streamlining exercise, Higgins comments, “what we deliver hasn’t changed, as we are still in the cyber security space with managed security services and special advisory, which are sold to corporate clients both domestically and internationally.”
This has resulted in, across software, GeoLang being integrated into the SecurEnvoy business, which Higgins says provides a number of benefits going forward. “ This will bring about improved efficiencies, time, money and resources and also more importantly, to give paid access to an unfettered client base of three hundred and fifty plus resellers to the GeoLang product set”.
Additionally, across services, Xcina has been integrated into Brookcourt Solutions.
Commenting on the H1 results, the CEO described them as being quite resilient against a continued difficult backdrop which positively saw forty-one new customers signed up.
With last year having proved a difficult one to navigate and which resulted in contract delays, Higgins speaks of the current picture and the usual second half weighting.
“We suffer, or benefit, depending on which way you look at it from that H2 weighting and we have seen a number of our clients delaying or seeing projects slipped. They haven’t cancelled or gone away, but the nature and size of our customers, which are blue chip such as large Banks, International Telecom companies and Global Technology companies means you just have to work at their speed".
The CEO adds though that they do however anticipate those deals to come through, where some as previously mentioned have already been delivered with others looking to follow in due course.
On the group front, the service arm is seeing a very encouraging pipeline of opportunities with high quality blue chip clients, whilst the securing of the first Government related contract appears significant.
“Previously it had been an untapped market for us where we had always shied away, as they can be clunky and slow and take time.
But, we joined the G-Cloud having qualified for that and because of the kind of technologies we get involved in, they are more top shelf, which are needed in today's climate. The Government is therefore waking up and realising that they also need it”.
Although unable to divulge too much on the deal, Higgins does say that SWG is providing the technology to look at all of the serious threats posed, including the dark web, thus providing a high level requirement to actively assess and deal with such threats.
As a result, the CEO is hopeful of further opportunities across the space of Government, particularly given the continuing and gathering pace of cyber issues.
Overall, the pipeline is strong says Higgins and ongoing and extensive investment has now delivered a more specialised offering which excels well beyond the lower-level security offering, with a much more complex product solution which sees SWG sitting way above the lower level competition.
Many of its customers that are top blue-chip players have ten years or beyond levels of engagement which demonstrates how entrenched it can become and which also provides for confidence in securing new business.
With what he describes as increasing momentum and traction Higgins says that all of their focus and energy is now focused on delivering the second half numbers.
On this front, investors will no doubt be hoping for updates on such contracts as they are signed, which would serve to underpin confidence and to that end I enquire as to why the recent and seemingly significant wins hadn’t been announced to the market.
“It’s always difficult with deals” says Higgins, “as obviously we would like to shout about them all, but timing of some of these come at key and critical moments and in addition to that, we don’t want to be seen to be overstating anything which can mislead, so timing can actually be very difficult.”
In terms of the typical length of contracts and value, the CEO adds that they have a great blend and mix of contracts across the group, with a large number of long- established customers with multiple contracts in place.
In the case such as major Banks, these will run for a two-three-year period with subsequent extensions, whilst at the smaller end customer base, these may initially run for one year, often dictated by budgets.
Monetary value also sees a wide range, from just a few thousand pounds in relation to smaller customers rising to the multi millions with majors such as a previously delivered £12m contract as Higgins describes a couple of million as being the sweet spot.
Looking ahead, he adds that there is an increased level of optimism leading to cautious confidence as budgets are released, as the nature of what they provide cannot be continually deferred.
Touching on levels of churn across the business, I am told SWG doesn’t really experience much to note, save for a low level on some software, whilst the largest service side is what the CEO describes as being very stable.
Rather, the overriding factor for the business is very much timing and customers budgets, which unfortunately remains out of their own hands.
For now, on the numbers front, broker Cavendish is looking for full year 2024 revenues of £32.5m giving adjusted pre-tax profits of £1m, EPS of 4.2p with net cash at £5m.
Looking ahead to next year, the same broker anticipates £36.7m in revenue with £1.7m profit as EPS moves to 7.1p whilst net cash is expected to increase to £7m.
That implies a PE of 11 falling to little more than 6 which looks cheap when factoring in the cash position against a market cap of less than £11m.
Of course, SWG disappointed last year and the shares fell from a significantly higher level than where they sit today, so it would appear that the market is continuing to take a cautious view on delivery.
If, however, further significant contracts are won and the numbers delivered, then the shares could climb some way northwards from the current levels.
Organic growth remains the focus for now, although further down the line additional bolt-on-businesses remain on the agenda, although Higgins is very mindful of potential dilution and where the current share price sits.
On a personal note, I’m happy to sit tight, showing a small profit on my investments to date, but which will hopefully increase as the tide continues to turn.
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