Back in the 1990s when mobile phones were first launched, it became apparent that the police, ambulance and fire services would need their own dedicated wireless network.
This network would need to be separate from the public Global System for Mobile communications (GSM) to prevent the interception of voice-calls and ensure it was functioning 100% of the time to handle emergencies.
So a new encrypted and super-reliable standard was born called Terrestrial Trunked Radio (TETRA). Since then, the technology has begun to be used in 104 countries, with Britain and Germany being the largest markets.
This is where Sepura steps in.
It is the world’s second-largest TETRA radio supplier behind Motorola, with around 29% of the market. The firm sold 125,500 devices in 2008 at an average price of £591 a piece. Of its revenues, 60% are derived from overseas and the firm closed the year with net cash of £5.4m.
However, the City was upset by the board’s cautious outlook. Because of the credit crunch, new international deployments of TETRA in Hungary, Spain, South Korea and Mexico are temporarily being delayed, pushing order-intake into the future. But the fundamentals remain sound and Sepura is now starting to see a healthy replacement cycle as other territories, such as the UK, upgrade to lighter, more durable and faster radios.
Sepura (LSE: SEPU)
The City expects 2009 turnover and Ebita of £77m and £10m respectively, rising to £82m and £10.8m in 2010. To me, these projections look kitchen-sinked. But even if things turn out to be this nasty, I still expect Sepura to achieve healthy top-line growth and widening profitability from 2011 onwards, in line with improved economies of scale. On this basis, using a 12% discount rate and an eight times Ebita multiple, I reckon the stock is worth about 60p a share.
There are risks, of course, not least from possible contract delays, foreign exchange fluctuations and fast-changing technologies. However, with a sound balance sheet, cutting-edge products and low exposure to bad debt, I believe the stock offers good value to the more adventurous investor.
Recommendation: speculative BUY at 37.75p (market capitalisation £51.5m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments