Every week, professional analyst Paul Hill suggests a riskier – but potentially very rewarding – share for the brave. This week: one of the world’s top developers of computer-assisted design and manufacturing software .
Gamble of the week: Vero (Aim:VERO)
Vero (formerly VI Group) is one of the world’s top developers of specialist computer-assisted design and computer-assisted manufacture (CAD/CAM) software for the niche mould-and-die industry. The software has been sold to more than 15,000 engineers worldwide, allowing them to build and operate sophisticated machine tools that can be used to manufacture the complex components used in the automotive, aerospace, medical, white goods and consumer markets.
The company was originally set up in 1988 by four Italian engineers and has consistently grown sales every year since. Revenues are split roughly as follows: 30% in the UK, 30% in continental Europe and 40% in the rest of the world. Two-thirds of sales relate to licence fees, with the remainder derived from services, such as project implementations and application support.
So how is the business performing financially? The picture looks encouraging. At last week’s interims, turnover rose 10% to £5.9m, despite the weakening dollar and yen, which jointly knocked 5% off the growth rate. The underlying operating profit margin was a respectable 8.7% (up 2.9% on last year), which in turn generated adjusted earnings per share (EPS) of 0.45p, helping to cut net debt to £1.7m from £2.3m in December.
As for the traditionally stronger second half, the group is optimistic, with its “markets remaining buoyant”. House broker Blue Oar Securities forecasts 2007 sales and underlying EPS of £12.6m and 2.1p respectively, putting the shares on a miserly p/e ratio of less than eight for such a high-tech business. So what are the pitfalls? Being exposed to the dollar/yen could continue to hit profitability, although in the longer term, Vero’s geographical spread should provide it with the scale to exploit growth opportunities wherever they arise. Secondly, as a small company, Vero is obviously more risky than most FTSE 100 stocks and could become squeezed by bigger competitors.
But on balance, Vero is a growing, well-run software developer, operating in a niche market with defendable positions. Finally, in the unlikely event that management does not deliver, then I suspect one of its competitors might buy out the business for its proprietary technology.
Recommendation: speculative BUY at 15.75p (market cap £5.9m)
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