Cigarettes, perfume, sunglasses, consumer electronics and even car parts – you name it and it’s almost certainly fallen prey to counterfeiting, a clandestine industry worth hundreds of billions of dollars globally. “If you don’t have a counterfeiting problem, you don’t have a successful product,” says Procter & Gamble. The firm estimates that about $100m worth of fake Procter & Gamble goods are seized each year. Fakes are made cheaply, which can undermine the trust that consumers place in brands. Moreover, the scale of the problem and the sophistication of the copies is growing due to technological advances. Pirated goods used to make their way into buyer’s hands via encounters on street corners, pubs and car-boot sales. Today, all it takes to reach millions of people is a laptop and an online connection. That’s all bad news for the counterfeiters’ victims, but it spells opportunity for one Aim-listed stock.
Gamble of the week: Opsec Security (Aim: OSG, 69p)
Opsec is one of the world’s leading providers of anti-counterfeiting and brand protection products and services. It serves more than 100 governments and corporations worldwide, protecting branded goods, banknotes, passports, cheques, driving licences, share certificates, gift vouchers, tickets, stamps, credit cards, and any other item that carries an intrinsic value. As if that wasn’t enough, the company has also expanded online, buying GenuOne in June 2006 for $13m. The firm’s software helps companies to spot fakes on the internet – clients include Intel and Titleist. In September, Boots was the first UK retailer to deploy the GenuNet system, using it to scan Ebay for sellers who illegally sell its products, such as No. 7, Soltan and Botanics.
By comparing the vendors’ names with verified customer lists, firms can spot counterfeiting and also find out where stolen goods are being sold. The GenuOne acquisition also means that Opsec is now able to pitch for large contracts involving both digital and physical protection.
So far so good, but what about the finances? House broker Oriel Securities predicts sales will reach £31m in the current year, with gross profit margins of 40% and earnings per share of 5.2p. This followed a bullish trading statement in September 2006, where the firm stated that results for the
year to March 2007 would be “significantly ahead” of City hopes.
Although earnings per share are predicted to fall in 2007/2008 to 4.7p (part of this year’s profit is due to a one-off gain), I still believe that, on a forward p/e ratio of 14.6 the shares offer good value. Opsec is expected to have net cash of around £3m at the March 2007 year-end.
With the desire to tackle internet fraud growing (Ebay, for example, is being sued by LVMH for letting fakes be sold on its website), Opsec’s medium to long-term prospects are attractive. Interim results are out on 29 November.
Recommendation: SPECULATIVE BUY at 69p (up to a maximum of 70p)