Long gone are the days when Sherlock Holmes had to peer through his magnifying glass to piece together intricate clues to solve the most complex fictional crimes of the 19th century. Datong’s high-tech surveillance products ear more resemblance to the creations of ‘Q’, the brilliant inventor in the James Bond films. Its field-proven technology is not only used for counter-espionage, but also more frequently in the fight against terrorism, organised crime and drug trafficking.
Datong designs bespoke high performance tracking systems for government, military and federal law enforcement agencies to assist their operatives in covertly tracking hostile vehicles, packages, containers and mobile phones.
Datong’s proprietary devices employ advanced radio frequency (RF) technology, which has a range of around ten miles, depending on the topography of the terrain. The major benefit of using RF is that the pulsed signal from the beacon is not easy to detect and it is extremely difficult to jam, unlike satellite (or GPS) or GSM (that is, mobile) communications.
Success in thwarting suicide bombers depends more and more on the quality of intelligence. Not surprisingly, in the light of increasing geopolitical concerns and the recent attacks in the US, Europe and Asia, high-tech surveillance is a rapidly growing market. UK investment in counter-terrorism is expected to top £2bn by 2007-2008 (more than double the pre-September 11 level). Independent research suggests that over the next ten years, spending on defence is expected to grow at 12% a year in the US and 17% a year in the EU. Expenditure in emerging markets such as the Middle East and Asia is forecast to be even higher.
Datong concentrates solely on advanced surveillance solutions that require covert detection, and invested £1m (or 14% of sales) in research and development last year to maintain its leading position in homeland security. Last year, sales rose 12% to £7.3m but earnings per share (EPS) fell to 7.2p, largely as a result of a delayed £1.8m US order. This triggered a sell-off in the share price from its initial public offering price of 128p in October 2005 to 88p presently. But performance is back on track, with the US contract expected by September 2006.
The US pipeline is “healthy”, with a “number of significant contracts expected this year”.
House broker Bridgewell forecasts turnover of £9.4m with EPS
of 8.2p for this year, rising to £10.5m and 9.8p respectively in 2008. Consequently, at 88p, the shares trade on p/e ratios of
less than 11 and nine for the next two years. Given the market’s long-term growth and Datong’s state-of-the-art technology, I believe this offers good value. The balance sheet is healthy, with net cash of £2.6m.
My only concerns relate to the difficulties in dealing with governments and increasing competition as the industry grows. Even so, with the exception of the delayed US order, the management has a good track record. Finally, as a positive indicator of underlying performance, the chairman has bought shares between 93p and 102p over the past six months.
The firm’s AGM is scheduled for Tuesday, 12th September 2006.
Recommendation; BUY at 88p (market cap £12.1m)
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