Lloyds joined other FTSE 100 banks last week in updating investors on their performance in the third quarter. Lloyds shares drifted after they said Q3 revenue was higher due to rising interest rates, but warned they had set aside £700m in provisions for potential bad debts.

With a steady stream of forecasts on the UK housing market suggesting we could see house prices fall next year, Lloyds has faced risk aversion from investors who want to reduce exposure to UK mortgages. Lloyds is the UK’s largest mortgage provider.

The Lloyds share price was trading up 2% at 42p at the time of writing and bouncing back from lows around 40p last week.

The bounce today was a result of reports over the weekend that UK ministers were preparing to stand down on their push to implement a windfall tax on UK banks.

There had been calls for another 8% windfall tax on banks by MPs following the release of strong than expected HSBC profits last week.

However, at a time the outlook for the UK economy becomes cloudier, an additional tax on the banks seems unfair given the stringent steps they have taken to protect themselves during the pandemic. There is also a risk an additional tax makes UK banks less attractive to investors.

‘Banks based in the UK already pay a considerable amount of tax, more than any other sector and more than any of our peers in other locations around the world,’ said NatWest Chief Executive Alison Rose.

The concerns from banking executives hit a cord with the UK government and over the weekend there has been mixed reports on whether Hunt and Sunak will indeed push forward with an 8% surcharge that would see banks taxed 33% on profits.

Sunak had previously indicated the 8% surcharge would be reduced to 3%.

The uncertainty around the banking windfall tax will persist until the actual announcement in the Autumn Statement 17th November.

Lloyds shares will react to any headlines relating to the bank surcharge in the meantime, and remains at risk until the announcement is made.

Solving the global problem of maritime domain awareness is what this company is all about and in this current year it is due to swing massively into profit.

This group’s target market is the world’s 26m vessels, millions of buoys and tens of thousands of ports dispersed across millions of km of coastline and over 370m square kilometres of seas, lakes and inland waterways.

Since 1987, customers from around the world have relied upon this company to provide them with solutions for their maritime monitoring, management and surveillance objectives.

Global leader in its sector

Based at Midsomer Norton near Bath and capitalised at just £65m, SRT Marine Systems (LON:SRT) is the global leader in Automatic Identification Systems based maritime domain awareness (MDA) technologies, products and systems.

It provides high performance proven turn-key MDA solutions for applications for vessels, ports, environment agencies, fisheries, and coast guards that deliver enhanced monitoring, surveillance, safety and security.

The group’s multi-billion-dollar global market takes in some 8m commercial and 18m leisure boats.

There are requirements for continued and improving security, safety, sustainability, environmental protection, economic and commercial safeguards.

Also, there are literally millions of kilometres of exclusive economic zones (EEZ) that have to be protected.

Two main operational divisions

The group has two main sides – digital automatic identification system (AIS) transceivers and integrated marine domain awareness (MDA) systems.

The three main operating subsidiaries are: 

SRT Marine Technology, which develops and provides customised core technology and OEM product and display solutions to marine electronics brand owners wanting their own range of high-quality customised AIS products; 

SRT Marine System Solutions, which provides complete turn-key maritime tracking, safety and security system solutions to strategic locally based system integrators; and

EM-Trak Marine Electronics, which provides a range of ‘em-trak’ branded AIS transceivers to a global dealer network addressing price conscious commercial and leisure boat owners.

Group products

The group’s products range from high performance AIS transceivers to fully integrated national maritime surveillance systems which integrate extensive networks of sensors such as AIS, Radar, CCTV, and communications with intelligent command and control, display and data analytics.

Group customers

The company’s customers include: Leading system integrators; Marine electronics companies requiring white label AIS technology and product solutions; Individual vessel operators; Port owners and operators; and National authorities such as national defence agencies, fishery ministries, navies and coast guards who require sophisticated maritime surveillance and monitoring systems.

Recent Trading Update

An initial trading update for the six months trading period ended 30th September 2022, released at the beginning of October showed a significant improvement in its business.

During the first half revenues were £18.8m – a 300% increase on the same period last year (£4.7m), generating an expected profit before tax to be not less than £1.5m. 

Despite continuing production constraints, the group’s transceivers business revenue grew by approximately 20% to £5.2m (£4.2m). While the systems business delivered multiple operational and several revenue milestones, generating some £13.6m (£0.5m) of revenue.

When announcing the interim Trading Update, CEO Simon Tucker stated that: 

“These results validate our earlier statements that both our business divisions have recovered and are now performing well, driven by a combination of good quality SRT products and fundamental long term market demand drivers. We look forward to the second half and providing further market updates with our continued progress.”

Interesting equity positions

There are some 180.7m shares in issue of which the group’s directors hold 9.83% of the equity.

Two private client broking companies have holdings – Hargreaves Lansdown Stockbrokers hold 18.3m shares (10.13%) and AJ Bell have 5.6m shares (3.09%).

Five private investors hold another 35% of the equity in aggregate.

Analyst’s opinions – 100p Target Price

Lorne Daniel and Kimberley Carstens, at the company’s brokers finnCap, are very bullish about the company’s shares, fixing a Target Price of 100p against the current 35.75p.

They noted that in the past two years the pandemic slowed installation of existing Systems contracts and paused the processing of new deals, leaving the company to rely on just its £8m of Transceivers sales.

The analyst’s estimates for the current year to end March 2023 are for £56.6m (£8.2m) revenues, adjusted pre-tax profits of £6.8m (£6.4m loss), generating earnings of 3.8p (3.3p loss) per share.

Conclusion – ready for outlook estimates being upgraded

With the group ready to announce its interims results on Monday 14^th November it is fair to expect some very favourable reaction.

The group’s shares were as high as 49p in early January this year, while they have since been as low as 23.6p.

Now trading at 35.75p, they are holding steady after the price rise in reaction to the favourable Trading Update at the start of the month.

On the basis of the finnCap estimates, it would appear that anticipation of achieving the current year’s estimates will be good enough to see the shares rise to trade up to 12 times price-to-earnings – which would be over 45p.

And that is without assuming that analysts will be upgrading their estimates for the coming 2023/4 and 2024/5 years after group guidance upon the interims being published.

Brokers finnCap are right, these shares are for buying.

The FTSE 100 felt the pressure of poor technology earnings in the US on Friday while a warning from NatWest hit sentiment around UK stocks.

The FTSE 100 was down 0.4% to 7,043 at the time of writing and remained above the key psychological support level of 7,000.

“Having held the line for most of this week the FTSE 100 finally caves to the negative pressure from big tech disappointments across the pond,” said AJ Bell head of investment analysis, Laith Khalaf.

“The FTSE 100 may be underrepresented on the technology front but the wider hit to sentiment from some of the world’s largest companies dropping the ball couldn’t be entirely avoided.”

US Tech Stocks

As Khalaf points out, the FTSE 100 had been largely immune to a string of poor updates from Meta, Alphabet and Microsoft the week but a sharp decline in Amazon shares proved too much on Friday.

Amazon provides an excellent insight into the health of the global consumer and their soggy outlook suggests economic strife in the coming months.

“The wider concerns from last night’s results point to a weakening economy, which although we’ve been warned about, still have the ability to spook the market when we see the tangible effects. The world’s largest retailer took investors by surprise last night with an utterly bleak outlook for sales, while profits could do a disappearing act because of fierce competition and soaring inflation,” said Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown.

NatWest’s third quarter update confirmed economic conditions were becoming ‘challenging’ in the UK, despite the bank enjoying higher revenue in the last quarter.

A trend has been established in companies posting relatively good Q3 numbers, but signalling clear concerns about the outlook for the rest of 2022 and early 2023.

The UK consumer

NatWest’s outlook corroborates economic predictions from economists, central banks and other corporates that we are in for a tough time in Q4.

This was reflected in weaker UK consumer stocks on Friday. JD Sports was 2.9% weaker while the UK housebuilders were broadly lower.

Ocado shares are highly sensitive to news on the propensity of Uk consumer spending and didn’t take some of NatWest’s comments well. Ocado shares were down 3.5% at the time of writing.

NatWest shares were unsurprisingly the worst performer on Friday sinking over 9%. FTSE 100 banks fell in line with NatWest with Lloyds dipping 3.5% and Barclays giving up 3%.

Both banks had reported this week but were not as pessimistic on the outlook as NatWest.