In fact, since bottoming out as a 19p penny stock in May, it has jumped 200%! This gives the company a market cap of £149m, meaning its still a relative stickleback within the overall UK stock market.

Should I buy this small-cap stock? Let’s explore.

On the crest of a wave

SRT makes advanced maritime surveillance and navigation transceivers. Its systems are used by coast guards, fisheries, and national agencies to improve maritime security, environmental protection, and regulatory compliance.

The share price has been boosted by a steady flow of new contract wins. In October, it secured a $213m contract with the Kuwait Ministry of Interior to provide an advanced maritime surveillance system over 12 years.

For context, SRT generated revenue of £8m in its 2022 financial year. So this was clearly a transformational deal for the firm.

Then in December, it signed a 10-year contract worth $9m with an existing Middle East coast guard client, followed by the commencement of the second phase of a project with an undisclosed nation’s coast guard, valued at $15m.

Why has the stock just surged 30%?

Today, the firm just released its half-year report for the six months to the end of December, and it was incredibly strong.

Revenue skyrocketed to £26.2m, up from £5.5m, and the gross profit margin improved to 46%, up from 37%. And SRT swung from a £4.6m loss in the same period last year to a pre-tax profit of £2.8m.

Meanwhile, its high-growth systems business now has £320m of active projects, all of which are scheduled for implementation over the next two years. Some have ongoing data and support contract periods of five to 10 years, providing long-term recurring revenue.

Chair Kevin Finn commented: “The future of our systems business is increasingly bright, driven by a long-term global trend of sovereigns wanting to digitise and dramatically enhance their understanding, oversight and management of their marine domains.”

Massive pipeline

Back in September 2023, I wrote that SRT’s “total addressable market appears very large…The stock is an interesting play on the long-term digitisation of the global maritime surveillance industry“.

I still think this. However, I sold my SRT shares in 2024 to invest in Windward (another maritime tech firm). I didn’t want to own both. But Windward was recently snapped up at a sizeable premium to what I paid.

SRT’s update was very encouraging, but multi-year projects in emerging markets carry execution and delivery risks. Political shifts in client countries could impact payments, while the business is still barely profitable. 

Also, based on last year’s revenue of £14.8m, the price-to-sales ratio is around 10. That’s pricey. However, I’m reading speculation that full-year revenue could now reach more than £80m. That would roughly be a 450% year-on year increase and make the valuation appear more attractive.

Looking ahead, the company sees a pipeline of opportunities from existing and new customers worth up to £1.2bn. This means the stock could still be a gem and I’m considering adding it back into my portfolio.

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However, I have a rule for investing in these market-cap minnows, which I’ll get to shortly.

Why are they risky?

Firstly, it’s important to understand what people mean when they talk about penny stocks, as well as the positives and negatives of investing in them.

Penny stocks, sometimes referred to as penny shares, trade with a share price below £1. And these small firms also have a market cap below £100m.

Due to their small size, many are unprofitable and a fair few are even pre-revenue (they have nothing to sell yet). Without much money to invest in research and development and new products, most never leave the penny stock arena. So they generally offer a higher level of risk.

Unfortunately, due to the low float of shares, they’re also prone to pump-and-dump schemes. These are when someone buys a large amount of stock and hypes it up, before selling it for a profit after other investors have piled in and pushed up the price.

This year, RC365 displayed all the hallmarks of this hype cycle. The stock chart says it all.

My rule for investing

Given the risks then, my golden rule is a pretty simple one. I never invest more than 0.5% of the value of my portfolio in a single penny stock, no matter how much I like it.

So if I had a £100k portfolio, I’d only put a maximum of £500 into a penny share. And I never have more than a handful in my portfolio at any one time.

An example of a big winner

Having said all that, they can also offer a higher potential reward.

Ashtead, for example, was a penny stock 20 years ago. Now, it’s a £20bn FTSE 100 firm and the second largest equipment rental specialist in North America.

Obviously, Ashtead is a very rare case. But it does show what is possible.

So, which penny stock do I like the look of right now?

The risky pick

At 39p per share, I’m bullish on the long-term potential of SRT Marine Systems (LSE: SRT). This is a £76m market cap firm that sells technology to helps vessels and waterway authorities so they can understand what is happening.

Now, the risk has been heightened here because the firm recently reiterated that results would be heavily weighted to the second half of FY 2024. Investors were spooked by this and sold off the stock. If H2 comes in light, it could fall further.

Yet I think this presents an opportunity. The company is a global leader in martine surveillance, which is a growth area due to the global adoption of the automatic identification system (AIS). Like air traffic control, this is a tracking system that transmits a ship’s position, identity, course, and speed.

Meanwhile, the shares look cheap on a forward P/E ratio of just 10. That could prove to be a very lucrative entry point, and I’m considering adding it to my holding.

The post Here’s my golden rule when investing in penny stocks and 1 risky pick I like now appeared first on The Twelfth Magpie.

Marine technology

SRT is a technology business that creates and sells advanced maritime domain awareness technology, products, systems, and services. It specialises in automation identification systems (AIS) and already possesses a worldwide footprint, with operations in Europe, the Middle East, North America, and the UK.

It is worth remembering a penny stock is one that trades for less than £1. As I write, SRT shares are trading for 42p. At this time last year, the shares were trading for 31p, which is a 35% increase over a 12-month period.

A penny stock with risks but potential rewards ahead

The rising adoption of AIS systems could boost SRT, in my opinion. To break it down into simple terms, the same way road traffic and air traffic systems work, to ensure flow of traffic, monitor risks, and help with navigation and course, AIS does this underwater. With SRT’s geographic footprint and rise in demand for services, it could see earnings and performance boosted. This is especially the case when you think of how vast seas are, with many ports, borders, and coast guard authorities to consider.

SRT’s most recent annual report, for the year ended 31 March 2023 was impressive. It recorded a group revenue increase of over 270% compared to the same period last year. Plus, each of its segments experienced growth. Finally, a forward-looking order book of around £160m could help boost growth in the coming years.

From a risk perspective, SRT has posted lots of losses in recent years. This is not uncommon for a penny stock. The losses have been due to lots of capital expenditure. I understand this is usually needed in the tech sector, especially with newer tech. However, at a certain point, it is important the business starts turning a profit for stability, growth aspirations, and providing shareholder returns.

Finally, SRT could find that technology may change and adapt and it may need to invest heavily to move with the times. For example, AIS adoption is increasing rapidly but currently there is only a minuscule number of ships to date that have adopted it. It could take years for the majority of vessels to undertake this adoption, and that’s if newer, better tech hasn’t arrived.

My verdict

Overall I believe there is a lot to like about SRT Marine Systems. As a penny stock, I understand that it is prone to volatility and there could be some turbulence ahead.

However, SRT looks like a great growth stock option. At present, trading for under 50p, the shares don’t look like a huge risk if a small number of shares were considered. There’s a good chance that over the longer term, the business could soar as AIS adoption continues to ramp up.

If I had spare cash to invest right now, I’d buy a small number of SRT shares for my holdings.

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[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

B.P. Marsh & Partners 

What it does: B.P. Marsh is a specialist private equity investor in early-stage financial services businesses. 

By G A Chester. B.P. Marsh & Partners (LSE: BPM) takes minority equity stakes in selective early-stage financial services businesses. It aims to exit with a good profit further down the line. It creates value for its own shareholders principally by increasing the company’s net asset value (NAV). It has a long history of double-digit annual NAV growth. 

The shares are trading at a 24% discount to NAV. The company’s also recently agreed a £51m sale of its stake in one investee company. Management will recycle much of this into new investments. But it also intends to pay shareholders a £1m special dividend, and dividends of £2m a year in 2024, 2025 and 2026. It’s earmarked a further £6m return, likely through share buybacks. 

There’s a risk the sale doesn’t go through (it’s subject to regulatory approvals). Either way though, I think the AIM stock’s many years of NAV growth, and the discount shares, make for an attractive opportunity. 

G A Chester does not own shares in B.P. Marsh. 

SRT Marine Systems

What it does: SRT Marine Systems is a global leader in maritime domain awareness technologies, products and systems.   

By Ben McPoland. SRT Marine Systems (LSE: SRT) is growing rapidly due to the ongoing global adoption of the automatic identification system (AIS). This is a tracking system that transmits a ship’s position and identity, enabling the precise monitoring of all marine traffic. SRT is a global leader in AIS systems and products.

Its customers include the United States Coast Guard and the Panama Canal. Yet the firm estimates that only about 500,000 vessels out of 26m currently have an AIS device, with thousands of the world’s ports and coast guards still to fully digitise their operations.

One risk here is the firm has been posting losses as it invests heavily in its technology. But growth last year was spectacular, with revenue rocketing 273% year on year to £30.5m. Its forward systems order book is up to £160m. And for FY 2024, brokers are forecasting 232% revenue growth (£70.9m), with a profit of £7.4m and earnings per share of 3.80p.

As I write, a current price of 47p per share equates to an attractive forward P/E ratio of 12.5 for the AIM stock.

Ben McPoland does not own shares in SRT Marine Systems.  

Warpaint

What it does: Warpaint sells affordable branded cosmetics under the brand names of W7 and Technic to major retailers and via its own website.

By Harshil Patel. Warpaint (LSE:W7L) is growing fast. It experienced “significant” growth across all its geographical areas. For the first half of this year, it reported pretax profit of £6.2m, up 77% from £3.5m the year before.

There’s much to like about this London-based cosmetics business. First, it’s still run by its founders. Founder-led businesses are typically entrepreneurial and carefully managed, in my opinion.

Next, its affordable range of cosmetics is proving popular in a world hit by higher costs elsewhere. By owning the brand and operating a small team, Warpaint has been able to keep its cost low and pass savings to customers.

Finally, there’s ample opportunity for growth. It aims to turn its W7 and Technic products into global brands. And so far, it’s making excellent progress.

Bear in mind that the AIM stock operates in a competitive space. And it’s surrounded by much larger players that have giant marketing budgets.

That said, its nimble operation has allowed it to become a highly-profitable and cash-generating business.

Harshil Patel does not own shares in Warpaint.

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However, there are exceptions, and I think SRT Marine Systems (LSE: SRT) could turn out to be one. Now at 47p, the penny stock has risen around 70% in one year, giving the company a market value of £91m.

What the company does

SRT Marine Systems is a global leader in maritime domain awareness technologies, products and systems. What does that mean? Well, put simply, the company sells technology that helps vessels understand what is going on around them at sea. It also makes systems that support authorities in understanding what is happening at sea, so they can better manage traffic, threats and risks.

This is a growth market due to the ongoing global adoption of the automatic identification system (AIS), a tracking system that transmits a ship’s position, identity, course and speed. This network technology enables the precise identification and monitoring of all marine traffic.

It essentially brings the seas and waterways in line with what has become the norm in air traffic control. Yet it is still early days, with management estimating that only about 500,000 vessels out of 26m currently have an AIS device.

Therefore, the firm’s total addressable market appears very large, and includes the world’s millions of buoys, as well as thousands of ports and coast guard authorities. The stock is an interesting play on the long-term digitisation of the global maritime surveillance industry.

Rapid growth

The company operates two business segments. It has its transceivers division, where notable customers include Trinity House (lighthouses), the Royal National Lifeboat Institution (RNLI), and the United States Coast Guard. In its latest annual report (for the year ended 31 March), this unit reported year-on-year growth of 60%, with turnover of £12.1m.

Meanwhile, its systems business generated revenue of £18.4m. Clients here include the Panama Canal and the Bahrain Coast Guard.

Annual group revenue then was £30.5m, representing growth of 273%. Its gross profit margin increased to 36% from 33%, allowing a small post-tax profit of £0.1m, up from a £5.8m loss in FY 2022.

Encouragingly, the forward systems order book is up to £160m, and the new pipeline contains prospects at various stages of the sales cycle, with an aggregate value of £1.4bn. So there’s a strong possibility of new contracts being announced over the coming months.

Attractive valuation

One risk here is that the firm doesn’t have a reliable track record of profitability. It has spent many years investing in its technology and products, but growth was held back by the pandemic. It completed an equity raise of £5.4m last year, but further shareholder dilution cannot be ruled out.

That said, analysts forecast that group revenue this fiscal year will rise 232% to £70.9m, with a profit of £7.4m and earnings per share (EPS) of 3.80p. Next year (FY 2025), sales are projected to hit £105m, with £11.5m in profits and EPS of 6.10p.

This puts the stock on forward P/E multiples of 12.5 and 7.7 respectively. For a growth company with such a substantial market opportunity, I’d say this is dirt cheap. So I’m excited to add the shares to my ISA.

The post 1 exciting 47p penny stock I’m buying in October appeared first on The Twelfth Magpie.

Indeed, my portfolio is primarily concentrated in more established shares, selected from well-known indexes like the FTSE 100 and S&P 500. However, I’m looking to add a small number of penny stocks to my portfolio this year.

One that looks attractive to me is SRT Marine Systems (LSE:SRT). This company develops maritime surveillance and safety systems used by coast guards, fishery authorities, and vessel owners.

A buying opportunity

SRT Marine Systems is AIM-listed. The company is a global leader in the provision of maritime domain awareness products. It produces a variety of automatic identification system (AIS) devices, designed to track and monitor seaborn vessels.

Although the SRT Marine Systems share price is up 10% over the past year, it slumped nearly 19% in 2023. That suggests today’s price could be an appealing entry point for me.

Granted, the business grappled with significant disruption during the pandemic. In the 24 months to 31 March 2022, the company made a cumulative post-tax loss of £11m. But I’m more optimistic about the firm’s future.

A stock that could sail higher

SRT Marine Systems is profitable once again. It posted a post-tax profit of £2.1m in the first half of the current financial year. In H1, the company also delivered a whopping 300% increase in year-on-year revenue to £18.8m. Plus, the gross profit margin was marginally higher at 38%.

What’s more, broker forecasts indicate revenues and growth profit will rise considerably over the course of the year. The outlook is especially rosy for the high-margin systems division, which concentrates on intelligence for coast guards and fisheries.

Admittedly, comparisons to a period in which trading activity was depressed due to Covid-19 might look favourable. However, forward guidance shows promise. The company’s validated pipeline of new system opportunities now stands at over £600m.

Moreover, the firm continues to innovate. It’s currently developing a new NEXUS radio product that will improve user convenience for maritime voice and data communications. This should help to expand the company’s reach into the sizeable commercial and leisure marine electronics market.

Time to get on board?

The company expects growth over the next five years will primarily come from Asia and the Middle East. Over a longer time horizon, the business also aims to tap into new opportunities in Africa and South America. I like the exposure this penny stock offers to emerging markets.

Increasing global challenges such as smuggling and piracy at sea point to a robust demand outlook for the company’s products.

That said, ongoing component shortages for the firm’s transceiver arm remains a headwind that could limit further share price growth. In addition, I’m also concerned by the company’s reliance on private bond funding. The balance sheet isn’t as strong as it could be.

Nonetheless, there’s significant scope for further contract wins. New deals could be transformational for the company’s profits and cash flow. I wouldn’t want to miss the boat on this penny stock, so if I had cash available, I’d invest in the company today.

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The floor coverings giant has grown earnings by double-digit percentages during the past three years. And the City expects earnings to keep on chugging higher in the near term and beyond, more on which I will be going into detail a bit later.

Of course there are also lots of other shares out there that, in theory, promise terrific earnings expansion in the years ahead, but that face plenty of obstacles to reach that point. And SRT Marine Systems (LSE: SRT) is one such stock.

In choppy waters

SRT — which develops, manufactures and supplies maritime vessel tracking technology — was last down 9% in Tuesday trading following the release of less-than-assured trading details.

The Bath-based company advised that revenues crept 10% higher during the six months to September, but pre-tax losses widened to £1.7m from £1.2m a year earlier.

Its OEM & Module division grew at 12% during the first half, while its em-trak business expanded by 60% year-on-year. Yet although performances in these businesses exceeded expectations, the firm noted that the absence of any material project milestones meant that no project revenues were recognised.

Although the City expects SRT to snap back from a 19% earnings decline in the year ending March 2018 with a 120% rise next year, a forward P/E rating of 41.1 times (sailing way above the broadly-considered value watermark of 15 times) would discourage me from piling in right now.

SRT was whacked at the end of the summer by news that a contract to supply an MDM national maritime domain surveillance system in South East Asia had been pushed back “due to internal project review and budget issues in their current fiscal year” with the end customer.

This resulted in an impairment charge of £1.5m for the current year and, while it is hoped that the deal will be resurrected when the client’s new fiscal year starts next March, this can hardly be considered a given.

I for one will be sitting on the sidelines for the time being, particularly as SRT’s elevated multiple could lead to further selling should the contract delay fail to resolve itself any time soon.

Step on it

However, and as I have already mentioned, I reckon Headlam is a terrific stock for those seeking robust earnings expansion.

The company continues to enjoy solid demand for its floor coverings from across Europe, and like-for-like sales in the UK and Continental Europe rose 2.1% and 3% during January to June. And the Birmingham firm is working hard to keep sales on an upward slant by bolstering its distribution network and expanding the group through shrewd bolt-on acquisitions — it made two more during the first half of 2017.

City analysts expect Headlam to deliver earnings growth of 5% and 3% in 2017 and 2018 respectively, leaving the business dealing on a prospective P/E ratio of just 14.7 times. When you also throw in giant dividend yields of 4.4% for this year and 5.3% for 2018, I reckon the business is worthy of serious attention right now.

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