Shearwater Group – Update should lift shares

An Interim Trading Update for the six months to end September is imminent from this cyber security solutions business.

And I am sure that it will be a positive account about the £22m capitalised group’s progress in the current trading year.

The Business

The award-winning Shearwater Group (LON:SWG) provides managed security, professional advisory and cyber solutions helping to create a safer online environment for organisations and their end users in both the corporate and public sectors.

It provides organisational resilience solutions in the UK, the rest of Europe, North America, and internationally.

The business has been built through acquisition, sells both through a direct salesforce and via partners, and is active globally.

Its growth strategy is focused on building a scalable group that caters to the entire spectrum of cyber security and managed security needs, through a focused ‘buy and build’ approach.

The Operations

Today it operates through two main segments, Software and Services.

The company offers SecurEnvoy, a software that provides identity and access management solutions; and Geolang, a software that delivers data discovery, data extraction, and data loss prevention solutions, services, and technologies to discover, classify, and protect sensitive data and information in the cloud and on premise.

It also provides cyber security, network monitoring technologies, and managed security services; business and technology risk assurance and advisory services; and penetration testing, red teaming, and offensive security consultancy services.

Group Sales

In the year to end March 2022 on a sales per business its services side had £32.54m sales, representing some 90.7% of the group total, while software was £3.34m (9.3%).

On a sales per region basis the UK made £29.53m sales, some 82.3% of the group’s total, Europe was £4.51m (12.6%), North America was £1.47m (4.1%) and the Rest of the World £0.37m sales (1%).

The Equity

There are 23.82m shares in issue, of which Schroder Investment Management holds 13.2%, Secarma Group 12.3%, Killik & Co 3.98%, SpreadEx 1.11%, Harwood Capital 1.05%, while three directors hold another 17% of the equity.

Insider dealing

Phil Higgins, the group’s CEO, bought another 25.000 shares at 92p each on 3 October, taking his holding up to 2.24m shares (9.4%).

The Full Year CEO Statement – great confidence

“I am pleased to announce a year of double-digit revenue and adjusted EBITDA growth for the Group. Key performance highlights include a strong year for advisory work, penetration testing and managed security services.

Developing trusted long term client relationships whilst deepening our expertise has allowed us to provide extended offerings to our blue-chip clients resulting in securing some of the largest contracts in our history.

In addition, seeing the size of the opportunity in the identity and access management software space, we have continued to invest significantly in our platform catering to this area.

This market backdrop, alongside the strength of our teams and security of our financial position, provide us with great confidence into the current financial year and beyond.”

Broker’s View – 200p ‘fair value’

Simon Strong, analyst at Cenkos Securities, rates the group’s shares as a Buy.

He is estimating a rise in sales to £37.7m (£35.9m) for the year to end March 2023, with EBITDA of £4.8m (£4.4m), worth 13.6p (9.5p) in earnings per share.

For the coming year he looks for £39.7m revenues, £5.0m EBITDA and 14.3p in earnings per share.

He has a ‘fair value’ of 200p+ on the group’s shares.

My View – 6.7 times current year is too low

Although my two previous Target Prices have not yet been achieved, I retain my faith in this group’s ability to produce the goods in due course.

The re-platforming of its Software side offers hope, while the cyber business is looking very strong.

The group’s order books must be expanding currently and an update on current trading could well bring about an upgrading of analyst estimates for this year and next.

The group’s shares, which have been up to 155p and down to 70p within the last year, are currently trading at around 92p, on just 6.7 times current year earnings.

At that level I believe that they offer a good short-term punting possibility and a medium-term buying opportunity.

(Profile 14.04.20 @ 245p set a Target Price of 310p)

(Profile 23.03.22 @ 118p set a Target Price of 145p)