Surveillance reveals Quadnetic

Intruder in the Thrifty 30. This week I’m adding Quadnetics (QDG) to the Thrifty 30 model portfolio. It makes surveillance technology and sells integrated surveillance systems. There’s plenty of hype about the need to control terrorism and loutish behaviour so, just to reassure you that I’m not being suckered in to paying too much. I’m not enthused by the surveillance story. It’s a bit like the defence industry it serves – in an ideal world you wouldn’t need surveillance, but this isn’t an ideal world. I hope we don’t need too much of it, and don’t have a strong conviction that its a growth market. Some surveillance, is, however necessary and I’m interested in Quadnetics because it looks like a good old fashioned value share. Quadnetics also sells, maintains, manages and runs systems for retailers, heavy industry, casinos, and local authorities. It installs mobile systems in buses and trains and lorries. The Look DriveSmart system monitors drivers (for safety and training purposes, not anti social behaviour). it was a struggling conglomerate, part security and part aerospace and engineering company, but by 2002 it had sold off all but Quadrant Video Systems, an ‘integrator’, designing, installing and maintaining security systems made from components, CCTV cameras, control software, hardware, and video recorders made by its sister company, Synectics, and third party manufacturers. Since 2002, it has been a good deal more profitable, although growth has been pretty flat since 2004, and in the year to May 2009 reported in its recent annual report, profits and profitability fell sharply. It looks as though John Shepherd was appointed a year ago to grow a company that had reached its limits under its former chief executive, Russ Singleton, now in charge of product development. But as delayed and cancelled orders, especially from defence, banking, and gaming customers coincided with the cost of developing its next generation of products, Shepherd has to manage a turnaround too. This month’s trading update emphasises cost cutting opportunities on top of the restructuring Shepherd conceived to focus on selling more of its own products in Quadnetics strongest markets:

  1. Mobile systems
  2. Industrial systems (deployed on oil rigs, in oil terminals, and chemical plants for example)
  3. Network systems (large scale systems commonly found in banks, shops, casinos and prisons)
  4. Integration, and managed services (where SSS, a Quadnetics company takes responsibility for procuring and running security services for a client)

Ignoring the costs of redundancies and reorganisation, the company’s profitability halved last year. Including exceptional costs it was barely profitable. But in other respects Quadnetics looks strong. It has no debt and in cash terms, as opposed to accounting terms, it’s more profitable. For investors who gain confidence from dividends (I’m not one of them) it also maintained its dividend. At 151p, the shares cost twelve times its average earnings over ten years, not quite in bargain territory but then the company isn’t in dire trouble. A Twitter friend tells me Quadnetics has a history of disappointing. It probably does, but your level of delight or disappointment depends on your expectations in the first place. Since Quadnetics doesn’t need to grow much to justify the current price, it just needs to recover, my expectations aren’t too high. I think the probability of disappointment is low enough to add it to the Thrifty 30 portfolio, which you can find in the usual place. Quadnetic’s mid price is 151p, but the spread is quite wide and since my broker’s only offering 153p, that’s the price I’ve recorded. There’s no mention of it in the annual report, but I am concerned that Quadnetics must benefit from a booming construction industry, and suffer when, like now, building projects are being delayed or cancelled. While the effects are likely to be temporary, the Thrifty 30 already has four holdings that are more dependent on construction:

  1. Alumasc, which makes building materials,
  2. Dewhurst, which makes buttons for lifts
  3. T Clarke, an electrical contractor, and...
  4. ...engineer Waterman.

It’s a dilemma for value investors. The numbers lead us into unfavoured sectors when others would diversify. On the other hand, we’re not going to beat the stockmarket by owning a spread of stocks that resemble it. To win, you have to be different, the question is, how different. Another irritation, Quadnetics is changing its year end. The next one is November 2010, a year and a half after 2009’s. At best, that will make comparisons with next year and this year more tricky, at worst it’s an opportunity to conceal a bad year by extending it. - Don’t shoot the messenger It’s happened again, says Jeff Matthews, an analyst tells the truth about a company, is snubbed by his own firm, investigated by its lawyers, and quits. Graeme Pietersz says a new study is evidence for market efficiency. I say it could be evidence of inefficiency. The author of the study is ambivalent. An efficient markets denier says "The key to outperformance is not to get caught up in the moment" (video). Sometimes the plain facts tell the story. Barry Ritholz compares the 2009 rally with the 1982 bull market. If governments selling gold indicated the bottom of the market, then governments buying gold might indicate the top says Peter Temple. There’s a facebook group devoted to Mandelbrot and finance. And here’s a picture of a Mandelbulb, an attempt to portray the Mandelbrot set in three dimensions.

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[...] unseat one of the existing Thrifty 30 companies, or spend cash, and the portfolio already contains Quadnetics, which serves the surveillance market Vislink is pushing [...]

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