4 Small Techies With Big Futures

Published in Investing on 4 November 2011

They all have value and growth potential.

After all the Eurozone debt crisis news, I thought it might be nice to have a look at a few small techie companies with exciting prospects as a nice change.

In doing so, though, I've been careful to rule out anything flying on a wing and a prayer. In other words, there may well be far more exciting techies around, but mixing at least a little real value, as opposed to hope value, into the equation rules them out.

These are the four I've come up with in descending order of market capitalisation (all are AIM-listed, so tread carefully):

1. SQS Software Quality Systems

I last looked closely at SQS Software Quality Systems (LSE: SQS) a year ago. At the time, the share price was 187p. It's now 157.5p (currently valuing the company at £44m), but it went as high as 243p earlier this year.

The German based company is the world's largest independent provider of software testing and quality management services.

The value basics look good for a growing techie. The prospective P/E stands at just 5.8, gearing is low at just over 9%, and the half-year results showed turnover up 29% to €95.3m, on which SQS made an underlying pre-tax profit of €2.8m. There's even a c.5% expected yield; a very welcome rarity in tech stocks, and the CEO holds a comforting 11.3% of the shares.

The first half was an excellent performance given the company's investment in new staff, training costs and investment in IT infrastructure. SQS said that it hired and fully trained an additional 260 new consultants during the period, resulting in a billable staff net increase of 137.

On the downside, SQS wasn't too optimistic about the rest of the year, and that was enough to send the shares down. Such short-term fears may well present long-term opportunity. SQS is waiting for the European economic situation to improve before it invests further. Revenues will be flat, but margins should improve as the company reaps the benefit of its recent investment.

I think SQS will reward patient investors.

2. Amino Technologies

Cambridge-based Internet Protocol TV (IPTV), and Internet TV specialist, Amino Technologies (LSE: AMO), has been growing quickly, unlike its share price this year.

The shares have lost 15% since the start of the year and are now 42p. What I like best about it is the 21p per share in cash, and forecast earnings for 2012 of 4.6p per share, making the P/E just over 4.5 against enterprise value.

Getting a real feel for this competitive market is difficult. Recent news that Amino was selected by one of America's largest telephone cooperatives implies quality. But I take greater comfort in the balance sheet and overall growth.

3. Norcon

I mentioned Norcon's (LSE: NCON), prospective value back in August, since when the shares have lost a further 9%, along with almost everything else. They're now 37p. This values the IT and communications networks project manager and consultancy at £18m.

Look back a couple of years and the shares are on a P/E of 3.4. So what's gone wrong? For the first half of this year, Norcon made a pre-tax profit of $3.3m, well down on the previous year, due to difficult economic conditions globally.

But there was also a lot of optimism with the results, and the brokers' expectations for the current year place the shares on a P/E of just 5.7. Norcon said a lot of outstanding balances were collected after the period end, resulting in a net cash improvement of over $7m. It had also secured new business in "target geographies".

There's a whopping prospective yield of 8.7%; high enough to imply it won't be paid. Time will tell. But with cash per share of over 10p, tangible asset value per share over 32p, the low P/E (looking back and forward), and what comes across as a careful long-term expansion of business, Norcon looks too cheap.

4. Belgravium

Shares in Belgravium Technologies (LSE: BVM) have more than doubled since I predicted they might just a year ago (it's a pity they all didn't!).

Now at 7p, the Bradford-based mobile computer specialist's combined businesses, which serve various blue-chips, are valued at £7m. Belgravium looks well-placed to profit from recovery, if and when we get it!

The company has more or less eliminated all its debt, and the balance sheet now shows net cash of £638,000 versus net debt of £711,000 a year ago.

With excellent first-half results, it said it is well placed to continue steady sales and profit improvement in the longer term, and is even considering the reinstatement of a final dividend. 

It isn't so long ago that Belgravium managed pre-tax profit of £2.1m and earnings per share of 1.4p. For now, the broker anticipates earnings of 0.73p, for this year and next.

Personally, I think the company will do better still, further out anyway, and expect the shares to progress steadily as a result.

For more tech share ideas, don't miss our latest free report, 3 Ways To Profit From the iPhone Revolution.

More from David Holding:

> David owns shares in Belgravium.

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jasonjarvisgbr 06 Nov 2011 , 4:12pm

Interesting ideas David. I'm looking for similar firms to add a small element of specualtion to my investing style.

While they are seem to be financially well sorted, businesses of this size and in this sector are only 1 missed signing from danger and with todays inflexible credit lines, I'm afraid there is little in the way of a safety net

Dozey1 08 Nov 2011 , 10:46am

Norcon has halved since I bought in a couple of years ago thinking a Norwegian firm with major contracts in the Middle East was a hedge away from sterling. Until you can see where growth is going to come from, forget it, I wish I could.

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