Paul Hill's Tip of the Week: cash in on petrol pump growth

Have you noticed the latest pandemic infecting the male sex? No, not a new virulent form of flu, but "football pundit-itis". This contagious and highly hallucinatory disease is turning normal working men into overnight gurus of the beautiful game. Expert opinions are being hotly debated across the country with regard to Sven's selections, Rooney's health and even Graham Poll's refereeing. I'll stick to stockpicking.

Tip of the week:

Orpak (ORPK: 140p), tipped as a BUY by Seymour Pierce

If you are as long-in-the-tooth as myself, then you may still remember the days when petrol stations were manned by attendants who would fill up your car with "4 Star". This customer service was replaced in the 1980s by self-service pumps, which are automatically linked to retail tills. Just about every forecourt in the Western world is now self-service, but it is still very much a novelty in many developing nations. In Turkey, for instance, less than 20% of petrol stations are automated, and worldwide, there are approximately 200,000 sites where attendants are still used.

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Orpak is a leading supplier of pumps for petrol stations, connecting the pumps with the retailer's tills and back-office systems. The business focuses on the higher growth regions of eastern Europe, South America and Asia. It has already gained a strong foothold in India, winning two large contracts in 2005. These deals are worth around $9m, most of which will be delivered this year.

Globally, Orpak's products are used in more than 7,200 sites and 1.4 million vehicles in 30 countries. Customers include major oil companies (Shell, Total/Elf, Repsol and Texaco), municipalities (Philadelphia), government departments (South African Department of Transport), airports (New York JFK, Paris Charles de Gaulle, Singapore), corporations (IBM, Motorola, Safeway) and major car fleet managers.

On top of this, Orpak is the market leader in combining vehicle identification with the integrated refuelling systems. This combination is particularly attractive to large fleet managers with petrol stations of their own, because the service allows them to save between 10%-15% of fuel costs by stopping theft. Most fleet-managed forecourts are unmanned and rely principally on trust. Orpak's wireless system regulates fuelling by using sensors in pumps and cars, so that only authorised people can dispense fuel.

Together, Orpak's two markets are worth about $1.2bn a year. Last year, sales grew by 43% to $35m, with operating profit margins expanding from 8.5% in 2004 to 13.3% in 2005. The improvement in profitability is a reflection of the high-tech nature of Orpak's proprietary systems, which generate gross margins of around 50%.

Revenue growth is forecast by Seymour Pierce to continue at 25% a year over the next two years. Last week, Orpak won $4.9m of new business with Shell in Turkey for installation of its fuel payment and automation systems. This was on top of a $1m order received from Russian fleet manager Mega Oil in April to provide vehicle identification technology.

Seymour Pierce estimates that Orpak will achieve EPS of 21 and 25 in 2006 and 2007 respectively, thus putting the shares on corresponding p/e ratios of 12.3 and 10.8. At 140p, I believe the stock represents good value, particularly for a technology company growing its top line by 25% a year. By the first-quarter results in May, like-for-like sales had increased by 31%, which further underpins industry estimates for 2006. The balance sheet is strong, with net cash of £11m. The shares were floated on Aim in December 2005 at 140p.

In summary, Orpak is profitable, growing rapidly and operating in an industry that is currently awash with cash due to the $70 per barrel crude oil prices. Customers recognise the benefits of implementing Orpak's proven technology, and have the fire-power to invest for the long term.

Recommendation: buy at 140p for the long term

Paul Hill's personal portfolio has gone up by 483% over the last five years. To find out more about his specialist share-tipping service, Precision-Guided Investments, click on the link below: