In spite of a recent blip, advanced CCTV and video systems venture Quadnetics is delivering solid cash and profits based on rising levels of repeat business from its diverse client base. Entering choppier economic waters in rude health – debt free, with £7.9 million of net cash at last count – its shares possess good long-term value.

AIM-quoted since 2002, Quadnetics is a global player with operations spanning North America, Europe and Asia. Active across all of the main control room surveillance markets, ranging from the local authority sector to financial services, transport, oil and gas, prisons, petrochemicals and casinos, its array of customers includes everyone from Thales, to BP and Halfords.

Structured into two core divisions, Quadrant Security is the biggest independent integrated security systems business in the UK, designing, installing and maintaining systems, as well as providing security monitoring and facilities management services. The Synectics division, meanwhile, is a developer of ‘e-surveillance’ technology for the control and management of advanced CCTV and networked security systems.

Management, led by CEO Russ Singleton, believe Quadnetics is well placed to capitalise on growth in target markets being driven by the increasing global need for security and protection, as well as the performance and cost advantages IT and ‘converged’ solutions bring.

Recently, Singleton has accelerated investment in new technology in order to capitalise on technological evolution in the sector and stay ahead of competitors. It is also important to note that rather than the volume, commoditised part of the market, Quadnetics’ is focused on specialist sectors where there is ‘critical cost of failure’ or extreme environmental requirements, which should ensure growth at good margins going forwards.

Unveiled in September, annual results to May met expectations, but these had already been downgraded following order delays back in May. While the top line grew from £66.1 million to £79.2 million, delivered organically and driven by 27 per cent sales growth in North America, underlying pre-tax profits dropped to £3.7 million (2007: £5.3 million) and earnings eroded to 18.9p (25.9p).

Having raised the bar with record profits in 2006/07, 2007/08 still represented a credible performance during a year in which there was a notable ‘lengthening of the procurement cycle’ in sectors such as defence.

Regardless, underpinned by an improved net cash position of £7.9 million (2007: £5.6 million), boosted by solid cash flow of £2.5 million and a building sale and leaseback transaction, investors were still treated to a half penny final dividend hike, increasing the annual total by 1p to 7p per share.

One very significant annual highlight was the strong 23 per cent growth in recurring revenues from £11.5 million to £14.1 million. These sales, comprised of maintenance and managed service revenues and ‘a key measure targeted by the group’, represent high quality earnings and build visibility into the business.

Given the downturn and the trickier trading outlook, analysts downgraded pre-tax profit estimates for 2009 from £5 million to £3.8 million, particularly to reflect delayed contract decision making in sectors such as defence, government, retail and banking. However, good growth is expected to resume in 2010, for which profits of £5.5 million have been pencilled in.

Looking ahead, the company, which has a good six-year record of growth, has the critical mass to weather short-term storms. Its balance sheet strength means acquisitions that bring market share or add capabilities can be readily financed.

With earnings expected to come in at 17.1p and 22.5p this year and next, Quadnetics is trading on lowly p/e multiples of 7.4 and 5.6. However, strip out its forecast cash of £6.7 million and the true p/e is lower still. Moreover, dividend payments of 8p and 8.5p mean the shares offer an attractive yield, substantially north of six per cent.

Quadnetics Group	AIM	£16.06m	95.00p	0.00p
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