Gamble of the week: buy into biometrics

published 14 September 2006

New chip and pin' technology has significantly reduced credit-card fraud, but this is only the beginning. The US immigration department launched biometric passports last year that use fingerprints to identify visitors. Voice, iris, DNA, hand geometry and facial recognition technologies are also being introduced in the fight against organised crime, illegal immigration, terrorism and espionage. It may seem like science fiction, but biometrics is becoming mainstream. For instance, IDS Worldwide, a major US biometrics and security solutions provider, forecasts that the global biometrics market will grow to $9.9bn by 2010. Our gamble of the week is a company at the forefront of this fast-growing market.

RC Group (Aim: RCG), BUY at 48p

RC Group (RCG), which is based in Hong Kong, began life in 1999 as a software developer and has since extended its skills. It now offers leading security and access control systems, incorporating facial and fingerprint recognition. Historically, turnover has been concentrated in southeast Asia and Hong Kong, but contracts have recently been won outside its home territory, particularly in the Middle East, where security concerns are acute.

RCG also develops Radio Frequency Identification (RFID) products that track goods, assets and documentation. RFID embeds mini-tags into products and identifies them through low-frequency radio signals. RCG's systems are used in warehouse management, assets tracking and carparks. The global RFID market is expected to grow from $2.7bn in 2006 to $12.3bn in 2010. Wal-Mart is currently implementing RFID in its US supply chain.

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My concerns are growing competition and management overstretching in pursuit of opportunities. But, to its credit, the board has recognised these risks and completed two successful placings to provide the required firepower to deliver its initiatives on time. £11m was raised in October 2005 at 38p and then another £25m at 53.5p in May 2006. This money is earmarked to fund future working capital, research and development, and acquisitions. At 50p, RCG has a market cap of £97m and a strong balance sheet with net cash of around £19m. The shares are good value as they trade on undemanding 2006 and 2007 p/e ratios of 7.8 and 6.8. Three directors bought shares at between 41p and 53p over the past nine months.

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.