Quadnetics
Quadnetics sell and support digital security systems. There are two parts to the business:
- Quadrant Security Group are the service side.
- Synectics provide the software, systems and products.
Turnover
2005: £27m
2006: £50m
2007: £67m
2008 (e): £80m
Profit (underlying, pre-tax)
2005: £2.7m (margin = 10%)
2006: £3.6m (margin = 7%)
2007: £5.3m (margin = 8%)
Dividends
2005: 4p
2006: 5p
2007: 6p
Balance sheet
Strong, no debt. Should have about £7m of cash at year end.
Segments
Services account for £46m of turnover; Products and software £20m. Margins are slightly higher on the products and software.
Most of the sales are currently in the UK, but their North American operation is growing, and they have various toeholds elsewhere.
Prospects
Over the medium to long term, excellent. There are various short term issues that will lead to disappointing profits in 2008, but I see no reason for these to continue longer than that.
They expect turnover of £80m in 2008. Lets assume £90m in 2009, which doesn't seem unreasonable given their growth to date. Margins seem to hover around 7-10%, so let's assume 8%. That suggests pre-tax profit of £7.2m, so £5m after tax.
This company is in a reasonably recession-proof industry, it is consistently profitable, suveillance is clearly a growth industry benefiting from the some significant technical developments. It has had some problems and it seems to have a very heavy management structure, so I'm not going to give it a crazy target P/E, but a fairly modest 12. That suggests a value for the company of £60m.
At a share price of 149p it is currently valued at £25m. In my opinion that's a crazy discount, and I see no reason for it not to move up to 350p for a gain of 140%. And if the market continues to be crazy I have the dividends to comfort me in the meantime.
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