SHEARWATER - MORE PROGRESS TO COME - 04/11/26

I’ve written about Shearwater Group (SWG) on a few occasions here previously, having taken the opportunity to speak directly with management and gain a better understanding of the business and its prospects.

Those conversations followed my purchasing shares in the 40p range a couple of years ago, which has thus far played out well, given they currently sit at 64p

Following delivery last week of the FY 2026 results, I caught up with the team once again to discuss the latest performance, progress across the group and perhaps most importantly, what comes next.

On the face of things, there is plenty to warm to, but equally, evidence of further progress needs to be both visible and delivered.

For now, revenue has continued to grow, resulting in a record number at £42.3m, whilst profitability is also moving in the right direction, with adjusted PBT of £1.4m delivered against last year’s £0.6m.

The group also has a healthy and welcome cash balance making up for a large slice of the market cap and it has already contracted £14.8m of the revenue target for the current year.

But, given the headline numbers only tell part of the story, I wanted to dig a little deeper, revisit some of the questions raised in our previous discussions and establish whether the latest progress is a sign of a continuation of the more recent turnaround.

Both CEO Phil Higgins and CFO Jonathan Hall were pleased with the full year outcome and looking ahead, Jonathan pointed to the positive future contracted revenue as providing for a good level of visibility and an indication of the trend.

And as part of that, Phil pointed to the business benefiting from the current positive backdrop, particularly across key markets such as the Financial Sector along with Telecoms.

He also stressed that these are blue chip customers and in the case of the Telcos, SWG actually has all of the main UK players signed up.  

Additionally, he said that these relationships go back many years which holds the company in good stead to both maintain and grow its business.

Importantly, the backdrop continues to be an extremely positive one, as cybersecurity issues are becoming ever more prevalent and increasingly dominating the news headlines.

Indeed, Cybersecurity is a strategic imperative for all organisations across both public and the private sector, so there would appear to be increasing opportunities for growth.

On that aspect, Phil said that they were seeing increased engagement and demand across front line protection which was being driven by its services arm.

This makes up for the bulk of the group revenue at circa 96% and includes security solutions that incorporates third-party hardware and software.

The latter is not merely the case of passing on someone else’s technology though, rather, it sees SWG providing specialist engineering, systems integration, consultancy and a complete managed security services offering.

The teams also work extensively with customers to both select, implement and support often complex security solutions providing the expertise to integrate it, manage it and maintain an ongoing relationship with the customer.

During the period, the services arm delivered a £25m contract extension with a UK-based global Telco provider, along with a £7.3m extension with a UK-leading mobile operator.

There was also a welcome £9m extension and expansion with a major financial institution.

Collectively, these provide for the likes of provision of advanced email gateway and insider threat management arrangements and the providing of solutions to deliver unified visibility, control and automation to protect sensitive data and serious breaches.

Jonathan also further echoed the positive tone on the prospects and cited the level of demand as supporting a phase of growth.

The aim is to continue to drive that organically, but to complement that, both stressed that they were certainly open to strategic acquisitions.

Going further, Jonathan pointed to the strong balance sheet as supporting the various options and that includes dividend payments or share buy-backs and the aim is to accelerate profits and provide positive returns for shareholders

The acquisition route could well be a positive direction to deploy some cash and could prove timely, given that many smaller players are now being impacted by the UK Cyber Security and Resilience Bill from earlier this year.

This could play out positively for the likes of SWG, as larger customers increasingly seek established secure operators, whilst many smaller MSP’s are likely to find the cost of compliance and investment restrictive.

Importantly, SWG has that solid balance sheet to execute, with net cash of £5.6m which broker Cavendish expects to increase to £7.8m next year.

Although the company has clearly endured a difficult few years which resulted in a poor operational performance, the more recent positive turnaround is both welcome and provides for further upside potential.

That said, whilst it has made encouraging progress, the next challenge is to demonstrate that the recent trading momentum is sustainable and is not about to stall.

In that context, the company now needs to convert recent contract wins, a growing order book and the improved financial performance into consistent revenue growth, improved margins and increased cash generation.

The foundations certainly appear to be in place and if management can continue to deliver, then the share price should act accordingly.

With operations such as SWG, margins are a key aspect for delivery and they can often be thin depending on the revenue mix, such as third-party costs.

That said, EBITDA has increased despite margin pressure, so if revenue can continue to scale up and a higher-margin mix of recurring services can flow through, then profit should also continue to increase.  

Aside from its services arm, the company also operates its own software offering, although this was impacted negatively in what is a competitive environment.

Phil said that they have made significant investment that was completed during the 2026 financial year and this should now place them in a more positive position on which to capture improved value of each deal.  

The software offering provides proprietary multi-factor authentication and data discovery software, is sold into 30 plus countries through a global network of resellers and enjoys substantially greater gross margins than the much larger services operation.

In terms of the end markets and away from both the Financial and Telecom sectors, Phil also sounded a positive note on the evolving Public Sector opportunity, where some decent contracts have been won.

Although still relatively early days, tangible progress has been made and it’s an area that looks like an increasingly interesting opportunity for SWG.

Having secured and expanded existing Government contracts, including a recent £1.7m Central Government win, the group is also widening its reach through G-Cloud 15, where the Brookcourt arm has increased its approved technologies by 77%.

With the Government placing far greater emphasis on national cyber resilience and defence, there is scope for this to become a more meaningful contributor to future growth, particularly as the company broadens its access to public sector procurement opportunities.

Looking ahead, SWG appears to have turned an important corner in what is a growth market, where it enjoys well established relationships, supported by a strong balance sheet.

If it can now benefit from operating leverage, improve the contribution from its own software offering, whilst selectively acquiring a complementary business, then the business could go on to really reward investors.

For now, Cavendish sees lower revenue for 2027 and whilst that may initially appear disappointing, management expects a greater and welcome contribution from higher-margin revenue streams with less emphasis on lower-margin third-party product sales.

That sees a broker expectation for adjusted PBT nudging up to £1.5m with EPS also increasing positively to 6.1p.

And with a positive free cash yield of 13% anticipated, net cash expected to swell to £7.8m and the shares standing on a forward PER of 10, then the shares remain attractive for me, hence my continuing to hold.