One small-cap tech stock to put on your list

As electronic devices evolve and demand more power, traditional batteries are finding it hard to cope. Tom Bulford investigates a cost-effective solution to the problem, and tips one firm poised to make it big.

This week I was given a new mobile phone by Vodafone. It had, unlike my old one, a camera, a radio, internet access and probably all sorts of other exciting things that I am yet to discover. All manufacturers want to load up their mobile devices with extra functions, but unfortunately battery technology is not keeping pace.

The amount of energy that a battery can store is growing by approximately 8% per year. But the power consumption of mobile devices is growing at more than three times that rate. Increasing battery performance is critical to all sorts of new technologies from the handset to electric cars. But a way of making more of what a battery can deliver today is by using a super-capacitor.

But progress is being made. It comes in the shape of something small and thin that may be found inside your mobile telephone. It is called a super-capacitor, and it can alleviate one of the biggest challenges of the consumer electronics industry

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How super-capacitors can give batteries super power

A super-capacitor is a variant of a capacitor which is itself a type of battery. Whereas a conventional battery stores a large amount of power and releases it gently, a capacitor can store a lesser amount of power but deliver it more quickly.

A super-capacitor is half-way between the two, storing a medium amount of energy and releasing it with medium force.

One application is for cameras within mobile phones. Today most mobile phones include a camera, but the quality of picture is often not very good. That's because, unlike a regular digital camera, the phone version does not have a flash bulb. The reason for this is that each flash requires a huge burst of energy and too many flashes will soon run down the battery.

A super-capacitor can act as a buffer, storing a low charge from the mobile's conventional battery and then delivering it when required with the sort of oomph necessary for a flash.

Using advanced materials, Australian super-capacitor manufacturer Cap-XX (LSE: CPX) - pronounced 'capex' - has created a tiny, thin super-capacitor which it claims is the best on the market. It has made this for a variety of customers in Malaysia. But specifically for camera phones and certain similar applications, it has licensed the technology to Japan's Murata.

CAP-XX has caught some attention recently. And little wonder. Its share price has jumped from 17p to 34.75p in the last few weeks a gain of 104% - which is typical of what I look for in penny shares.

But if the forecasts of broker Seymour Pierce are anywhere near accurate, CAP-XX shares will rise a whole lot further.

Here are the numbers. In its latest financial year to June Cap-XX made a loss of AU$3.1m on turnover of AU$7.8m. This year, Seymour Pierce's analyst Derek Brown thinks that Cap-XX will make a AU$1.8m profit on revenues of AU$ 10.6m. Nothing to get too excited about so far.

But now let us look out to the financial year 2011/12. For this, Brown's crystal ball reveals revenues of AU$29.5m, a profit of AU$14m and earnings per share of AU$22.5c, which in real British money is 12.5 pence.

On that basis, the share price trades on less than three times projected earnings. So we can say with certainty that either these forecasts are way too optimistic or else the shares are sure to be about five times higher in three years time.

Brown, in fact, has calculated a fair price of 214p based on a ten-year discounted cash flow model. That is even more exciting a projected gain of 515% from today's price.

But it is also a huge leap of faith in the notably fast-moving electronics industry.

Murata has built a new factory to produce these super-capacitors, and it is due to open next month. Forecast sales from this factory are the basis of Seymour Pierce's ambitious forecasts.

Will they come true? Well, super-capacitors are not new. And although Cap-XX patented its own version, a technological lead does not necessarily last long in this vast industry.

The shares are intriguing, speculative, and a great example of the type of high growth and innovation that characterises the penny share market. They might be worth a small punt soon.

This article was written by Tom Bulford for the twice-weekly investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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