This week’s gamble, with annualised sales of around £70m, designs, integrates and controls advanced CCTV and networked video surveillance systems. The market for analogue CCTV products is in decline as the conversion to digital gathers pace, driven by cheaper bandwidth and storage capacity.
Quadnetics (Aim:QDG)
Quadnetics is at the forefront of this digital upgrade cycle and holds number-one and number-three positions in the UK on-bus CCTV and high-security markets (eg, prisons), while enjoying second and third places in the global oil/gas and casino sectors. Customers include Stagecoach, Shell and Caesars Palace.
But how is the business performing? Well, although first-half (H1’08) results were affected by supplier problems and contract slippage in both the UK and Middle East, like-for-like revenues still rose by 7%. The interim dividend was also hiked 25% to 2.5p, on the back of a cautiously upbeat outlook and net cash of £7m (or 41p per share) as at 30 November.
Chief executive Russ Singleton commented that “demand for our new digital products is positive and our bid pipelines and order books are healthy”. But although the outlook is “positive for H2’08 and beyond”, the board also commented that “results would be more second-half weighted than usual”, implying “a note of caution” given the uncertain economic environment.
Yet Quadnetics should be relatively resilient in a recession, as it serves a broad spread of sectors – the top three being high security, retail and oil/gas. It also has a strong base of recurring revenues, with 48% of sales being generated from ongoing maintenance and/or managed service contracts.
House broker Landsbanki is forecasting turnover and adjusted earnings per share of £69.6m and 25.2p respectively for the year ending May 2008, rising a year later to £75.4m and 27.5p. As such, the shares trade on corresponding p/e ratios of 6.2 and 5.6, which looks good value for an expanding technology firm with a solid balance sheet and paying a 4.5% (7p) dividend yield.
Fine, but what are the risks? In my view the main concerns are the possible impact of increasing competition, margin compression and the timing of contract wins – particularly in a softening climate. There is also a foreign exchange exposure due to the group’s presence in North America and overseas. But as a show of confidence last week, two non-executive directors bought chunky stakes at 141p, while Landsbanki has a ‘buy’ rating and a price target of 358p on the stock.
Recommendation: speculative BUY at 149p (market cap £23.4m)
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