Gamble of the week: security stocks back in the spotlight

published 10 July 2007

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)

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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.

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.