A key part of being an entrepreneur in a fledgling business is taking calculated risks. Unfortunately, these can occasionally prove embarrassing when things don’t go quite according to plan – especially when there’s no other positive news to compensate for it.
This is what happened to niche British technology firm OMG in May, when it posted disappointing results for the first half of the year. The culprit was a delay to a major animation project (called Guardian), which cost the firm £1m. However, in the grand scheme of things this should only be small beer. Besides, the board reckons that all outstanding monies will be paid in the second half of the year.
The groups’ major breadwinner, Vicon (69% of turnover), sells advanced motion-capture technology to gaming companies and Hollywood studios. The latter have employed the clever cameras in blockbuster films such as The Chronicles of Narnia, Iron Man 2 and Black Swan.
OMG’s equipment is also deployed in the less cyclical world of medicine and sports science, where it is used to record the movements of athletes (in a bid to improve performance), children with cerebral palsy and people undergoing rehabilitation. What’s more, Vicon signed a licensing agreement in 2009 with Microsoft, to incorporate their SenseCam application into its exciting new Revue product. The camera is worn around the neck, records all movement and serves as a memory aid for patients suffering from Alzheimer’s Disease. A cutting-edge consumer version is also planned in the next 12 months.
Its other two units are even more state of the art. Yotta’s (23%) advanced systems allow highway authorities to gauge a road’s condition by simply driving a mounted camera around, rather than having to send someone out with a trundle wheel and a mobile phone. Customers include the Welsh Assembly and the Cheshire/Merseyside councils.
In terms of the numbers, house broker Evolution is forecasting 2011 sales and underlying EBITA of £31m and £1.8m respectively, rising to £33m and £3.6m in 2012. On this basis I would rate the company on a ten times multiple, which after adjusting for £2.3m in net cash and discounting back at 12%, delivers a fair value of 43p per share.
As a smaller business, OMG carries a greater degree of risk than it would were it larger and more diversified. It is also exposed to foreign exchange, lumpy orders and margin pressure and would suffer in another recession. But OMG is profitable, well financed, pays a dividend and offers tons of upside for the adventurous investor. It’s also probably an attractive takeover candidate. House broker Evolution has a price target of 55p.
Rating: SPECULATIVE BUY at 28p