Gamble of the week: keep an eye on this surveillance systems provider

published 21 June 2007

In round figures, the UK CCTV security market is worth £530m with between four and seven million cameras already running across the country. Researchers forecast that this will rise to £639m by 2010, representing an annual growth rate of 4% a year. On top of this steady growth there are attractive opportunities abroad, especially in North America. For example, the huge US gambling market is replacing its analogue surveillance systems with digital technologies. Around 700 large casinos are expected to upgrade in North America over the next three to five years, representing a potential opportunity of $200m to $350m. And this week's gamble is well-placed to cash in.

Gamble of the week: Petards (Aim: PEG)

Petards specialises in advanced CCTV systems for the security, surveillance and defence markets both in the UK and internationally. Its main products include digital video recording (DVR), control systems and in-car surveillance including Automatic Number Plate Recognition (ANPR). The group generates £23m of revenues from customers such as the Ministry of Defence, BAE, Virgin Trains, the US Defence Department, Treasure Island Casinos and Disney.

Petards has had a chequered past and has seen its shares suspended on two separate occasions first in 2002 as a result of a breach in banking covenants, and second in 2005 after some accounting errors came to light. Not surprisingly, these events dented investor confidence and urgent action was required. A new management team, led by Bill Conn (chief executive) and Andy Wonnacott (finance director) was appointed last year and set about restructuring the business. Costs were reduced, new contracts won and astute bolt-on acquisitions completed. All this has transformed the firm's fortunes.

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In February, Petards issued an encouraging trading statement and is expected to return to profitability this year on revenues of about £25m. The house broker, Collins Stewart, is forecasting 2007 earnings per share of 0.12p, with operating profit margins increasing to 4.3% and net debt falling to less than £5m by the year end. The company is in far better shape than it has been for years and, although there is still plenty of work to do, its prospects are looking much brighter. There is risk of increased competition the likes of BT, Alcatel, Cisco and IBM are becoming more active in the sector but the shares are trading on a p/e multiple of less than ten, which looks cheap, given the upside potential. Additionally, Petards has £13m of tax losses to carry forward to offset against future profits. In fact, this could prove an attractive asset in the event that it becomes an acquisition target for a competitor. Full-year results are expected later this month.

Recommendation: SPECULATIVE TURNAROUND at 1.08p (market cap £7m)

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.