SHEARWATER SOUNDING MORE BULLISH - 13/05/25

I last took a look here at cybersecurity, advisory and managed security services company Shearwater (SWG) back in December of last year, the shares at the time hardly conjuring up much excitement.  

Back then, I caught up with management to hear more on the prospects of the business and the potential for a turnaround on that share price front and subsequent returns for investors, where patience has certainly been tested.

Despite the shares having remained in the unloved space, it would appear that progress is being made, suggesting a turnaround in fortunes is within reach and on the cards, which recently led to my catching up with management once again.

At the outset, the share price performance certainly isn’t lost on both the CEO and CFO and I was told that they are very much in tune and aware of that, sharing the frustrations of the private investor base.

CEO Higgins who holds a significant stake in the company himself said that they were very much intent on increasing the level of engagement with shareholders moving forwards and upping activity where they can on the news front.

Having previously cited his feelings on the business prospects as being one of cautiously  optimistic, this time round he sounded a more upbeat tone, with an elevated level of confidence.

One point I was keen to touch upon at the outset however, was whether management was aware of any large or determined seller in the background, given that any increase in the share price on the back of positive news has been curtailed by a bout of sales.

On this seller aspect, Higgins said that this wasn’t the case, as he expanded, “when you look at our top shareholders it has remained pretty static, although every now and again people like Schroders who represent multiple investors do sometimes see some selling.

Having said that, the volumes are pretty small in size and we obviously track everything that goes through the 3% holding, so we haven’t seen anything of any nature.”

Going further, the CEO said that it is pretty frustrating and as part of the process of dealing with the share price performance and visibility they took the decision to shift their year-end.

Under the previous fiscal year-end, communication was very much limited or unpredictable due to the specific timing of contracts with a Q4 bias, which in more recent times resulted in a missing on numbers.

In relation to announcing certain and meaningful deals, Higgins added, “What we see, is that when we make those contract announcements there is a bump in the share price, but then we see what we believe are smaller private investors electing to take some profit.”

That is a view I would certainly concur with, having witnessed the trend first hand as others will have done, which certainly adds to the frustration.

Clearly though, something needs to happen to break that trend and provide for a sustained recovery in the share price, where the current valuation is at extreme odds with the enterprise value of the business.

Higgins acknowledges that investors need to see evidence of growth and ongoing improvement to drive sentiment and they are determined to address that.

 “The level of sellers isn’t actually that unusual, but it is the absence of buyers that makes the difference as the share price dips on low volume.

One of our jobs is to be more proactive and energise interest in the stock as we believe there is momentum in the business and a positive story.”

In terms of the business and recent news, last month the company announced a significant £8.4M contract renewal, which has subsequently been followed up just last week with a new and major contract that is worth £4.4M over three years in the data security space.

The customer is in keeping with SWG’s blue chip base, being described as a prominent telecommunications company serving millions of broadband, mobile and home services subscribers across the UK.

Of course, investors will be aware that this recent news flow hasn’t resulted in an upgrade at this point, rather, the support is to the existing numbers that are out in the market.

Higgins was at pains to point out that some of these big deals take time to conclude and that has presented problems in terms of getting them over the line at a given moment in the cycle, so the year end change should provide for a better and improving picture on that front.

In terms of announcing contracts, Higgins added that they really only RNS deals that are $1m plus, with the rest largely being business as usual, where he added that there are plenty of these ongoing.

Importantly, from an investor perspective, the space appears to be experiencing an improving picture, where the CEO said that they are more bullish now than the previous cautiously optimistic tone that had been stressed.

As we are all well aware, there doesn’t appear to be a day go by without the revelation of another major cyber-attack and those are clearly not confined to major businesses, so the sector is understandably a focus for growth.

Indeed, industry commentators are widely eyeing and forecasting a CAGR of 14-15% over the next few years, with the overall market anticipating hitting $560bn by 2032.  

SWG is of course a relatively small player, but with a solid blue chip customer base and being a cash generative business delivering an expected £39m for full year 2025, the current market cap of just £8.5m looks deep in bargain basement territory.

And unlike other players with weak or debt laded balance sheets, SWG sits on a significant net cash position, making up for a sizeable chunk of the market cap.

Sure, an element of that is handy to support working capital, but nevertheless, the company remains in a healthy position providing for opportunities ahead to utilise some of that surplus as net cash is anticipated to come out at £5.6m at the 2025 close.

Having endured a post covid environment where people had stopped spending and reigned back, thus resulting in a slowdown of activity, Higgins said that they are now seeing something of a refresh.

“Threats are now ongoing as witnessed by M&S and things have now got to catch up from where they were, so we are seeing more opportunities coming through the pipeline and increased activity right across the industry.”

Whilst the sector is largely fragmented with many players acting purely as resellers, SWG appears to sit in a more opportunistic space, where although it purchases specific technology from other larger players this is undertaken to support its own offerings.

Going further on the reseller space, Higgins added that there are over 80k businesses selling Cisco products, resulting in a race to the bottom on the margins. “We don’t play in that sort of space, the ones we are interested in is where there is good strong double digit and repeatable revenue.”

The areas SWG deals in, or is focusing on, are “must have” products and services which are no longer options but real requirements  I was told, being leading edge and deep learning and working across the dark web.

“The type of things we get involved with are more strategic and stickier and over the longer term have better margins.

And if you look at our software side of the fence, obviously there are certain regulations that we get involved with involving specific standards, where we do our own code ourselves which we own outright.

Returning to the balance sheet and the positive cash position, I was keen to hear as to whether the board would consider utilising some of that for buy-backs in the future.

Higgins said that there were a few aspects to raise in order to answer the question, in that they need to get things very much in the right order.

In this context he refers to the timing of previous communication and delivery, so with the year-end shift, that line of communication to shareholders has now improved.  

This, he said, will provide for greater visibility and a better line of talking to and communicating with the market which is planned, which will hopefully fuel interest.

One of the aspects of the picture he added, is how do they actually drive and grow the share price, where they are now well placed to do that, whilst also looking at all of the options to assist in the process.

There are, he said, various options to consider in terms of increasing shareholder value and returns and the buy-back is one aspect of that.

On this he added that there are moments when you consider if it is a good time to execute on it, particularly with the share price being cheap at the moment.  

“There is provision for potential buy-backs in the future and it is something we do visit and talk about regularly.”

CFO Hall added, “we are conscious, particularly in the current market that we want to maintain a healthy cash balance, where it means if big deals come in, we have a strong working capital position to support that.”

Going further he said that their stance has been that if the cash balance gets over £5m, good options to use some of that should be considered and that buy-backs are definitely something amongst other initiatives they would consider.

Rounding off, I raised once more the prospect of a delisting and the business being taken private, but as in my previous conversation, the CEO saw no merit in the option regarding the aim of shareholder returns and the overall prospects of the business.

Equally, should an interested party that isn’t just bottom feeding approach the company with a realistic proposal in value terms, then the board would clearly be open to listening if it was attractive.

For now though, it is very much all about delivering on the numbers and progressing on the back of what is now a positive industry backdrop.

Broker Cavendish is looking for full year 2025 revenue of £39m and adjusted PBT of £0.4m and EPS of 1.5p, rising to PBT of £1.1m and EPS of 4.5p in full year 2026.

If the 2026 numbers can be delivered, then at the current price, SWG trades on a forward PER of under 8 with an attractive looking PEG of 0.2 and where it trades on a paltry EV/Sales multiple of circa 0.3x.