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Rooting about among techMARK fledglings might prove rewarding. Some share prices have been knocked by sentiment rather than facts

Buying into technology at present might strike even the most bullish of investors as a foolhardy idea, and with good reason. Profit warnings continue to roll in from the likes of Baltimore, Intel, Marconi and a host of other tech stalwarts. Software has been bashed, telecommunications is in the doldrums, chipmakers have been fried and internet companies are disappearing faster than you can say boo dotcom.

Punters who have only been paying part-time attention to the sector would be forgiven for thinking that every tech venture everywhere was in trouble. Fortunately, this is very much not the case. Lost in the dreary atmosphere of fear and loathing has been a group of pugnacious techMARK fledglings which have done their best to defy the gloom.

For investors with a sense of adventure, and a willingness to stock pick, rooting around among the techMARK fledglings could prove rewarding. This is because, despite bucking the general trading trends (and very often posting sales and profits increases), many sport share prices that have been dragged to the bottom by sentiment rather than fundamentals.

Intelek good for the long run

A prime example of this in the telecommunications equipment sector is Intelek. This group recently produced excellent results for the year to March, posting profits of £2.1 million on turnover of £35.9 million, and reckons it has the stamina to maintain this improving trading run. Roger Brocklebank of house broker Old Mutual is a keen fan of the company, and is looking for profits to more than double this year to £4.4 million with earnings coming in at 3.6p, putting the group on a forward p/e of a mere 9.6.

Of course, in the prevailing financial environment, forecasts of any sort need to be treated with a degree of caution. But that said, Intelek offers a number of causes for optimism. Not least of these is the diversity of its products. The group, which recently completed the acquisition of satellite communications specialist Paradise Datacom, makes products as diverse as advanced microwave circuit boards, satellite modems, radio frequency sub-systems and satellite communications monitoring equipment.

Of all its operations, its mid-Wales-based microwave processing specialist Labtech is the jewel in the crown. Labtech increased sales by more than half last year and already boasts a 54 per cent increase in its forward order book for the current year. This was against a historic 25 per cent increase in the telecoms infrastructure market that it supplies to, a market that is expected to slacken to about 10 per cent growth this year.

Brocklebank highlights the fact that Intelek trades at a substantial discount to the electronics and electrical equipment average (average p/e of 15.4) and if his expectation of around 28 per cent annual earnings growth over the next three years turns out to be anywhere near accurate, Intelek could soar.

Defensive technology

Equally attractive is Jasmin, a group which is focused on the relatively defensive transport, defence and security-focused IT markets.

To be fair, Jasmin has had a chequered few years but all the indications are that it has more than turned the corner. It reduced losses to £0.4 million from £1.1 million in the last financial year, and actually made a profit in the second half. Its order book currently stands at £16 million, compared to £3 million in June 2000.

Brocklebank suggests the company's share price (it is now on 159.5p, well below a year-high of 182.5p) fails to reflect its potential. Jasmin's loss-making past could also work in its favour over the next 12 months or so as it has built up £2.3 million of tax losses to offset against future profits.

This year it is forecast to achieve profits of £1 million, which should deliver around 18.2p in earnings. Like Intelek, it has a value feel to it, trading on a forward p/e of just 8.8.

Defence technology specialist Radstone Technology is another fledgling due some investor respect. It recently reported buoyant demand for its 'ruggedised' computer products from the US and European defence markets, reflected in an order book up 64 per cent to £74 million at the year-end 31 March 2001. Results for that 12-month period were ahead of expectations, with £4.1 million in pre-tax profits and £41.3 million turnover.

Broker Beeson Gregory expects £5.1 million in pre-tax profits for the current year, rising to £6.1 million the next. This puts Radstone on a prospective p/e of 16.4 at a price of 237.5p and market value of £56.5 million.

Not everyone is a fan of Radstone though. Charles Stanley's small company specialist Robert Corden cautions that though Radstone 'is a super little company with a very low risk profile, I wouldn't buy them at 237p'. Corden adds that he would want 25 per cent earnings growth for a small company at that price rather than 20 per cent. In the current market, however, 20 per cent growth seems attractive.

Compelling evidence

But one company that Corden does like the look of is IT equipment rental and services firm Compel, which he calls 'bloody interesting', situated as it is 'in the fastest growing part of a fast-growing sector'.

Results for the year to June are due within the next few months and are expected to show a loss of about £1.5 million. But this is due to turn into a pre-tax profit of £5.3 million in 2001-2, leaving Compel on a forward p/e of just 7 at a price of 84p. Corden reckons the business's longer term prospects, which have been highlighted by it winning a string of 'partner' awards from Oracle, justify a rating of at least 15.

Corden also points out recently demerged software companies Gladstone (because it has about 15p per share of cash on a share price of 21.5p) and Transware ('seriously cheap') as well worth a look. It might be worth doing likewise to insurance industry software provider Total Systems, which turned a loss of £600,000 into a profit of £700,000 in its last financial year, a result ahead of expectations. It expects further growth this year, and like Compel, actually pays dividends as well.

E-noser smells good

For those who like their techMARK fledglings to come with a biotechnology hue, one very intriguing company is 'electronic nose' developer Osmetech, whose shares look significantly undervalued according to analysts.

Such reasoning is based on the potential of its sensor-based technology, which is used to sniff out the micro-organisms in the gases that are emitted by bacteria. The different applications of this technology incorporate customisable arrays of sensors that can detect a range of diseases. One of these applications, a device called the Microbial Analyser, is awaiting crucial US FDA (Federal Drug Administration) approval, due in the autumn. The OMA as it is known, is designed to detect the odours that are indicative of urinary tract infections (UTIs), for which 500 million tests are conducted worldwide every year. At around the same time as the results are due, Osmetech is set to make another submission for a device used to detect bacterial vaginosis.

All the testing completed so far seems to suggest that the concept is a workable one, something that could prove incredibly lucrative, for the OMA can produce results in just 15 minutes, compared to the 24 hours it takes using current procedures. A recent study by St Thomas's Hospital in London reports that this device 'shows considerable promise'.

The current price of 12.5p (valuing Osmetech at £28.4 million) discounts the risks disproportionately according to Teather and Greenwood's Howard Miller and Bell Lawrie's Iain MacArthur, the latter of whom has set a price target of 31p. Commercialisation is at least three years away though, and depends on FDA approvals and other factors progressing according to plan. But the long-term potential could be huge.

Biotech believers

The same could be said of diagnostics and branded pharmaceuticals maker Provalis, which is 'progressing very nicely' according to Beeson Gregory analyst Dr Julie Simmonds and has 'two very solid businesses' plus the potential of new vaccine products coming through its R & D pipeline. Its key product is Glycosal, a 'point of care' diagnostic operable by GPs that measures haemoglobin levels in diabetics. Worldwide sales are said to be progressing well following last year's launch and a home use version is under development. Cash of over £12 million at the interim stage in December, when the company reported a third consecutive reduction in half-year losses (to £2.1 million) also augurs well, justifying Old Mutual's 'strong buy' rating. Profits are expected in 2003.

But Provalis's share price has suffered over the past year, and it now trades at 13.25p, just over a third of its 52-week high, giving it a market valuation of £31.1 million.

It is a similar story at CeNeS Pharmaceuticals, which Simmonds is also keen on and says is 'very undervalued' given the range and quality of its offering. The diversified Cambridge-based drug developer has a number of different drugs at various stages of testing, the principal one of which is a morphine derivative pain relief treatment that has none of the other versions' side effects, meaning that patients spend a lot less time under care. Results of Phase II testing are imminent and it should pass relatively speedily through Phase III. If it passsed this phase, it is likely to reach European markets by the end of 2003 and the US in 2004.

But its market valuation, £60.6 million at 37.75p, is nowhere near reflective of CeNeS' quality according to Simmonds, who reckons that the company is worth more like £282 million. The 52-week high is 92.7p.