Undervalued Petards returns to profit

Petards has fought back following a terrible 2013 and returned to profit after doubling revenue last year. Management remain cautious, but investors continue to back the AIM-listed security and surveillance firm.

Turnover reached £13.5 million in 2014 and Petards made a pre-tax profit of £620,000. In 2013 it lost £2.4 million on revenue of £6.3 million. But despite a better second half during which Petards' eyeTrain product sold well, gross margin still fell from 40% to 30% over the year.

Clearly, there is still work to be done. But maintaining the order book at £20 million means the group has decent visibility - over £10 million should be delivered this year. The board were, however, cautious when it came to dishing out dividends, opting instead to wait for more evidence that its recovery is sustainable.

Working in the transport, defence and emergency service sectors, major contracts were signed with Siemens, Bombardier and the Ministry of Defence last year (see chart) with another £1.5 million Siemens deal going through since the period end. The commercial contracts relate to its eyeTrain product.

Broker WH Ireland still reckons Petards is worth about 50% more than the current market cap, so worth keeping an eye on.

"Based on our forecasts, the shares currently trade on a FY 2015E fully diluted PER of 7.9x and EV/EBITDA of 3.7x. Given the order book visibility, we believe that these multiples significantly undervalue the business. Ascribing a 20% discount to the wider Support Services sector PER multiple of 14.7x implies fair value of 18p per share. As such, we maintain our Buy recommendation."

Petards has undergone a lot of change over the last year and market confidence is slowly returning. The shares inched higher Monday and at 12.5p trade on about 8.3 times forward earnings. That reflects forecasts for double-digit EPS growth this year, a more modest mid-single digit improvement in 2016, and no dividend.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.