Long gone are the days when Sherlock Holmes solved crimes from his Baker Street office. This firm’s number plate recognition systems are more akin to “Q”, the brilliant inventor in the James Bond films, rather than the pipe-smoking detective. Its field-proven technology is used not only for police enforcement and traffic management, but also to fight against terrorism, organised crime and drug trafficking.
Gamble of the week: Appian Technology (Aim:APN)
Appian develops ANPR products for governments, police forces and companies for security, surveillance and traffic management. Its infra-red ANPR camera (known as Cobra) can decipher number plates in all weathers, at night and at high speeds.
So how is the business faring? Like many other small-cap companies in niche markets, it has recently struggled to close a few large orders before its September year-end. In an unforgiving environment, the shares have been savagely hit by the profit warning, falling to near all-time lows of 6p. I think this is an over-reaction.
Firstly, these delayed contracts are still “live” and the firm “maintains a strong pipeline of new prospects… with interest in its products at an all-time high”. Moreover, the market remains buoyant since ANPR is increasingly being used globally to improve police productivity, enhance surveillance and meet new demand for road and congestion charging schemes. Secondly, Appian’s technology is tried and tested, and is being used by all 43 police forces in England and Wales, at several airports and in many other installations. International opportunities are also substantial.
Finally – although there are presently no up-to-date broker forecasts available – I estimate sales will rise from about £5.5m for period ending Sept 2007, to £7.5m and £9.0m over the next two years, at which point it should deliver underlying earnings per share of around 0.6p. Hence the shares are trading on a 2008/2009 p/e multiple of ten, which appears good value for this science-rich firm. As at 31 March, Appian had net cash of £0.4m, which, although tight, should be enough until it becomes self-funding this year.
There are undoubtedly risks. It’s a small company operating in a dynamic market with strong competitors, such as PIPS Technology, who run the London Congestion Charging scheme. Appian may also need to raise fresh equity if there are more contract slippages.
But with a top-notch customer base and first-rate proprietary products, I rate Appian a buy for the more adventurous investor. Full-year results are due out in January 2008.
Recommendation: speculative BUY at 5.88p (market capitalisation £8.7m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments