SHEARWATER LOOKS WELL PLACED TO DELIVER - 14/11/2025

It was back in May of this year when I last took a look here at Shearwater (SWG), the shares then standing at circa 36p.

At the time, I spoke with key members of the management team and noted a more upbeat tone on the prospects for the business, which saw me happy to continue holding the shares.

Since then, although there hasn’t been much on the news front, what there has been continued in a positive vein and the shares duly responded to a more recent 61p mid-price.

Following on from that previous catch up with both the CEO and CFO, SWG has now delivered results for the full year 2025, which covered a 15-month period.

Despite registering annualised revenue growth to £31.6m which is equivalent to £39.5m for the 15 months, that saw adjusted EBITDA of £2.2m and adj PBT of £0.6m, the shares retraced sharply on results day to a current 50p.

Perhaps the absence of any significant new contracts being announced, or the £11m non cash impairment charge relating to two previous acquisitions were enough to provoke the bout of selling.

If so, it could provide an opportunity for those with a longer-term horizon who believe that the business can continue on the road to recovery.  

As previously mentioned here, SWG is a player in the cybersecurity and advisory services space where it serves a number of blue-chip customers, particularly across banking and telecommunications.

Admittedly, it operates in a very crowded and fragmented sector and the company has hardly fired investors' imagination in recent years, having disappointed in delivering on the numbers.

That said, for a business that is operating in what is now a buoyant and growing market, the current market cap of £12m against a net cash position of £5.1m and aligned to forecast revenue for full year 2026 of £35.5m with adj PBT of £1m, remains attractive to me.  

Speaking with both CEO Phil Higgins and the CFO Jonathan Hall, it is clear that the more positive tone continues, which if paving the way for a full year 2026 delivery on the numbers front, sees the stock trading on a forward PER of 11.

That, against an expected year end net cash position moving to £7m suggests to me that the shares could well kick on again with a more distinct rerating.

It is of course worth weighing up a few more bearish aspects within the investment case though, in that there have been past disappointments on delivering on expectations.

It must also be noted that a certain amount of the cash pile is required for working capital purposes, which is something to bear in mind in terms of the valuation.  

In order to gain a better feel for the outlook and prospects for the business going forwards I have again caught up with CEO Phil Higgins and CFO Jonathan Hall.

Higgins was quick to remind me and stress that they have long standing and multimillion pound contracts with leading banks and telcos, which sees the deals running for a number of years before a renewal.  

Although he stressed that given the size, such contracts do take time to be completed, what SWG provides is very sticky, proving positive in terms of churn for such a business.

With rising cyber crime a major threat to businesses, it is not surprising to see the current global market value of $219bn forecast to increase to $563bn by 2032, which represents a CAGR of 14.4%.

Despite being a relatively small player in the global arena, Higgins said, “we are now going after more of those big corporates and we don’t tend to lose customers when we get in with them, as they do tend to stay with us.

Some of our customer relationships go back to 2007 and 2008 and they are still there today.”

That is an important aspect for the company going forwards, particularly in light of the anticipated growth across the whole cybersecurity space.

In terms of the recent performance, CFO Hall told me that the top line revenue growth had been driven by the services division which makes up the vast bulk of revenues.

Within that, he said that costs were very tightly controlled leading to improved efficiency, whilst AI tools are playing an increasing role within its services.

Additionally, they will, he explained, be investing more going forwards into sales.

Higgins further emphasised that the services division now accounts for 95% of the group revenue and this embraces a number of facets with ongoing growth potential.

This sees cutting-edge cybersecurity solutions being provided to its blue-chip client base alongside consulting services.

The latter includes the likes of penetration testing and risk management assurance, providing an ability to service all sectors with a particular strength across financial services and telcos.

Software licenses I was informed run on a one-three year timeframe and are accompanied by hardware, support and engineering services.

Given its current market cap, it is perhaps worth a reminder of some of the sizable contracts that have been won more recently, which includes a $12.8m deal with a new client in the form of a leading global telco.

This was for the development and security of its 5G network and is spread over a five-year period.

There was also an $8.4m contract renewal with another leading telco, whilst a year contract worth £1.5m sees expansion activity with a client where there has been a circa twenty-year relationship in place.  

Higgins also pointed out that the technology SWG is providing is addressing the problems of tomorrow and much of it will not have been seen before. This is a differing proposition than the off the shelf offerings that are what he explained as often being yesterday’s products.

AI, not surprisingly features and the CEO said that the company had been incorporating this into its tech for a while now.

He went on to say that they are now talking to clients about the post quantum world, which although not upon us yet, is clearly coming and he added that SWG will very much be ready to go on the front foot.

The post-quantum world relates to quantum computers being powerful enough to actually penetrate and break today’s widely used cryptography, which signals the need for businesses to be ready in anticipation of what that could bring.  

“We are laying the stones now for the future growth of tomorrow and it is something that we are well known for within the industry” Higgins added.

However, given past disappointments and frustrations on delivery, I was keen to gauge the level of confidence on actually meeting the 2026 forecasts.

Higgins firstly referred to the prior periods where he stressed that during and immediately post covid, a lot of things slowed and came to a stop, which obviously impacted the company.

Going on, he added that it has taken time for things to normalise and actually get flowing again but on the back of high- profile cybersecurity events, money is now being spent again.

Activity has also increased, which he said is now presenting some big opportunities, where given the strong cash position at SWG, sees the business well placed to execute.

Although such potential contracts do have to be won, Higgins sounded upbeat enough, citing that they are seeing more activity now than what they experienced last year.

As things currently stand, £15.4m of contracted revenue is carried forward from existing contracts where the expectation is that £10.7m will be realised in the current full financial year.

And, having made a strong start to the year, the expectations are for delivering on the Cavendish numbers in the market, particularly as the prospects for converting opportunities within the pipeline from Q2-Q4 appear positive.  

On the cautious side, the company did announce the non- cash impairment charge, which related to the goodwill and intangible assets within its software and Pentest arm.

Although non-cash, investors will no doubt be tuned in to whether this is just a one off or could see a repeat further down the line.  

It is also worth noting that the smaller and higher margin software arm fared less well, although it has registered £2.6m of recurring revenue and with a revamped sales team and a new sales director appointed, it may now be poised for a more positive period.

Within that, the aim is to utilise the Amazon Web Services (AWS) in order to address the valuable US market, which would provide exposure to potential new customers.

As SWG already has a US office and is serving customers there, the move would appear a sensible one in order to leverage the offering.

Despite sitting on a decent chunk of cash that makes up a sizable element of the current market cap, SWG doesn’t appear set to embark on another acquisition anytime soon.

Higgins doesn’t rule it out, but speaks of organic growth, whilst also pointing to the costly multiples that software businesses can command in the marketplace, so it would have to be a compelling opportunity.

Additionally, as already mentioned, having a decent cash position does hold such a small company in good stead when pitching for business with major players.

No doubt investors would like to see a dividend installed or potentially buy-backs, but for this investor, at this juncture I would like to see the cash used to drive for growth, which is something that has been lacking in the past.

For now, the shares may hover around current levels or perhaps ease further, but if new and significant contracts are forthcoming in the near-term underpinning expectations, then the shares could well kick on again to higher levels.

Looking again at the market value against the solid balance sheet, revenue and potential for registering meaningful profit on the back of a positive space, then I am happy to hold.