Ubisense tipped to rocket

Ubisense probably expected more when it listed on AIM in 2011. Its share price and market capitalisation are roughly the same as they were three years ago, althogh that's largely due to a sell-off since February that has wiped 40% off the software company's share price. But a tactical shift to higher-margin software solutions is paying off and the shares look good value.

Car manufacturers like BMW, Daimler and VW love Ubisense's real-time location intelligence (RTLI) software. Its sensors automatically adjust tool settings for different models, saving companies time and money. Airbus, Deutsche Telekom and utilities like Duke Energy use it, too.

Revenue grew by 40% during the six months ended 30 June to £17.3 million, and would have been £1.4 million more but for the strong pound. Solutions business - made up of products like Smart Factory and myWorld (now endorsed by Google) - surged by 46% to £8.5 million and now make up almost half the total. That's important as returns here are higher - gross margin grew by 520 basis points to 33.9%.

That turned a £400,000 loss a year ago into adjusted cash profit of £200,000 this time. It would have been double that at constant currency, say management. An extra £2.9 million of operating costs and chunky amortisation charge explain a widening of pre-tax losses from £1.5 million to £2.1 million.

And there's a steady stream of new business. The order book now stands at £15.8 million, up 12%, and further orders during the third quarter provide good visibility on revenue for at least the rest of this year. That's why bosses are confident of hitting full-year forecasts.

Broker Canaccord Genuity expects Ubisense to increase sales by 37% in 2014 to £37 million, generating adjusted cash profits of £1.9 million, up almost three-quarters. It pencils in £42.4 million and £3 million for 2015.

There are opportunities for growth, too. Ubisense has consistently estimated that the German automotive assembly plant market alone is worth about €110 million (£87.6 million). There's also plenty of room for margin expansion in Asia where Ubisense currently does very little solutions work.

Canaccord reckons the shares - currently at 168p - could be worth 280p. Peter McNally at Charles Stanley plumps for 305p. They might be, one day. But the usual caveats apply. Adopting this technology does take time and Ubisense admits that much of its revenue is currently generated by a small number of large deals, which means even slight delays can mean revenue shifts from one period to the next.

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