Gamble of the week: a payment services provider worth paying up for

published 24 October 2007

If you bought petrol at ASDA or Morrisons recently, chances are you paid via this company's payment and loyalty service. Paul Hill explains why a history of innovation and plans for future expansion mean this stock is worth taking a risk for.

Gamble of the week: Universe Group (Aim:UNG)

Universe Group is the holding firm for HTEC, one of Europe's largest providers of payment and loyalty services for petrol retailers. Of UK forecourts, 3,500 are equipped with HTEC products, as are ASDA and Morrisons, along with five of the world's top six oil majors. It was also the first firm to supply an unattended chip and pin payment terminal for outdoor use, and is about to implement the first global online loyalty scheme for a major oil firm with data collected across three continents.

HTEC is expected to grow revenues organically by around 10% a year over the next two years, driven by technology upgrades and structural changes in petrol retailing, where big oil groups are withdrawing while independents and supermarkets move in. Both trends are boosting demand for ever-more complex forecourt systems from payment at pump, to loyalty cards and automatic number-plate recognition. HTEC supplies all these products, and seems to be in the right place at the right time.

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Furthermore, HTEC is changing its manufacturing-led model to focus more on services. It has just established a fully hosted, end-to-end managed system for petrol forecourts, and signed three new revenue-share deals with Jet Wash, Air Tower and Vacuum Systems. Not one to rest on its laurels, it is also expanding its loyalty-scheme software overseas, using its existing BP Premier Points and Total Oil Tops infrastructure as a reference site. Universe Group is also trialling its online Electronic Funds Transfer service with a major supermarket.

These are undoubtedly exciting times, not only for top-line growth, but also for long-term quality of earnings. Further out, there are also opportunities to improve its 10% operating profit margins by transferring manufacturing from Southampton to lower-cost regions.

House broker Charles Stanley is forecasting sales and underlying earnings per share for this year of £14.0m and 0.9p, rising to £15.6m and 1.0p next. That puts the shares on a miserly 8.3 times adjusted earnings. The balance sheet, following a £3m placing at 7p in March, is also sound, with only about £700,000 of net debt. The board is "confident of future growth".

Although there are certainly risks for instance, being a small player selling to large, global customers I believe there is substantial upside for investors. Indeed, at these levels I would not be surprised to see a trade buyer such as Orpak (Aim:ORPK) launch a bid. The news that in August two directors purchased 575,000 shares at between 7p to 9p, is also encouraging.

Recommendation: BUY at 7.5p (market cap £9m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.