Gamble of the week: security stocks back in the spotlight

On the back of last week's attempted car bombings in London and Glasgow, Gordon Brown called for greater vigilance, especially in crowded areas, such as shopping centres, sporting events and airports. This week's gamble is one group that should benefit from increased demand for security services:

Gamble of the week: Sectorguard (Aim:SGD)

Sectorguard was founded in 1998 by chairman David Marks, it is a one-stop shop' for manned guarding, mobile response, CCTV surveillance and retail tagging services. These are sold individually, but there is a growing need for integrated services, which enable clients to have one single point of contact.

For example, JD Sports, one of the UK's largest sports retailers, hires Sectorguard for manned guarding, CCTV and intruder alarm services, together with in-store merchandise tagging. In the first half, the group also won contracts with Carillion, the London Borough of Camden, London Metropolitan University and the Medical Research Council, among others.

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Fine so far, but what do the financials look like? Last year, turnover was £17.8m and underlying earnings per share came in at 0.34p. But 2007 has started disappointingly, with first half revenues and earnings per share marginally lower due to some lost contracts and higher investment. However, the strategic picture looks brighter. Gross profit margins rose from 21.6% to 23.4%, and more business is being derived from higher-margin electronic security activities. Moreover, the £232,000 acquisition of Euro Security Systems in June should reinforce this trend and provide greater penetration in the retail sector.

This year will be a period of transition as SectorGuard upgrades its infrastructure and systems and makes changes to fall in line with new laws such as the increase in statutory holidays from 20 to 24 days from October. But moving into 2008, the group's prospects should recover as it benefits from economies of scale generated by its recent acquisitions. Assuming the company can generate operating margins of 5% (4% in the first half) and return to growth, then an underlying earnings per share of 0.35p or more should be achievable next year putting the shares on a paltry 2008 p/e of ten. House broker Seymour Pierce has a 4.25p price target on the stock with a buy rating.

Recommendation: speculative LONG-TERM BUY at 3.5p (market cap £11.5m)

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