Share tip of the week: online fraud specialist

This security specialist is a good punt on the rise of online credit card fraud, says Paul Hill.

Online fraud ranging from identity theft to credit-card abuse and organised crime cost the global economy £52bn last year, according to research house Global Uncertainties. And it's likely to get worse. Only last week the FBI busted an international gang of hackers who had siphoned off $70m from the bank accounts of small businesses, towns and churches. Moreover, the financial loss is sometimes dwarfed by the damage done to a firm's reputation and subsequent destruction of shareholder value. So how does one fight back?

One approach is to call in anti-fraud specialists such as Norkom. This Dublin-based software developer operates globally using a mix of direct and distributor sales channels. Its products enable financial institutions to protect their clients against online theft, money laundering, breaches in compliance and many other e-commerce crimes. All told, these applications have been deployed in more than 100 countries, including at six of the world's top ten banks (including HSBC, Santander, and Standard Chartered), across continental Europe (48% of sales), America (26%), Asia (11%), and the rest of the world (15%).

But combating cyber-crime is just one growth driver. Another is tighter regulation, as governments introduce new laws to avoid a repeat of the credit crisis. Stricter regulatory regimes are being put in place in the West, eastern Europe and Asia. Indeed, in September Norkom bagged a prestigious contract to supply its software to VTB Bank, the secondlargest financial group in Russia.

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Tip of the week: Norkom Technologies (Ireland: NORK; Aim: NORK), rated a BUY by Goodbody Stockbrokers


The deal came after President Dimitry Medvedev approved tougher rules aimed at bringing Russian banking into line with international standards. Norkom has also announced a partnership with MasterCard to help its customers tackle fraud. Last week a high-ranking Chinese delegation visited its offices China is soon to implement new banking rules, and Norkom is in active talks with a number of domestic institutions.

But it's not all champagne and chocolates. Norkom is not immune to conditions in the wider economy. Last month it released a profits warning, sending the share price down by 40%. The board blamed lengthening sales cycles, which have hit seven deals, and delays in regulatory changes across the Pacific Rim. For instance, in Japan the deadline for compliance with new laws has been delayed from October 2010 to July 2011. The same applies in Malaysia and Indonesia, where authorities have sought to take the heat off finance houses by delaying reforms.

As a result, broker Cenkos has cut its 2010/2011 turnover and EBITDA estimates to €49m (from €49.3m last year) and €3.7m (€10.2m). But this is a minor irritation. The company is seeing a return to growth in the US and has a solid balance sheet with a cash pile of €41.6m (or €0.45 per share) at the end of March. I'd rate the stock on a ten-times earnings before interest, tax, depreciation and amortisation (EBITDA) multiple (assuming margins of 20%).

After backing out the cash this gives an intrinsic worth of around €1.50 a share. Key uncertainties are how long this soft patch will persist; competitive challenges from the likes of Actimize, Fiserv and Wolters Kluwer; a stronger euro; and further delays to new banking laws. But given the growth profile of the industry and the trophy nature of the firm, Norkom is a buy. Cenkos has a price target of 130p (or €1.49). Interims are out on 9 November.

Recommendation: BUY Norkom at €0.91 (market cap €81.7m)

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.