The news flow from two small yet innovative technology stocks confirms that exciting prospects abound at both.

Like all small technology businesses, we want to get on the radar and have more people trading us so we’ll keep acquiring,’ chirps Andy Makeham, the live wire chief executive behind £35 million business software counter K3 Business Technology, which earns its keep in the manufacturing and retail sectors.

Long undervalued, K3 has scaled up through the earnings-enhancing £14.3 million acquisition of McGuffie Brunton, boosting its UK presence in the resale market of Microsoft-based SYSPRO ERP manufacturing software.

The deal also brings with it a complementary geographic footprint – McGuffie, like K3’s SYSPRO distributor, IEG, is a Manchester-based business – and the scope for significant savings, all of which clearly excites Makeham. ‘They are the other UK SYSPRO distributor. Same town, same product, yet in complementary markets,’ enthuses Makeham, eyeing meaningful savings and synergies from the deal, which stoked the group’s oft-inert share price.

Following strong 2006 numbers (marked by an impressive profits surge to £2.8 million from £2.1 million), shop broker Daniel Stewart has upgraded its 2007 earnings forecast from 13.1p to 14.5p, suggesting earnings growth of 33 per cent this year, even after acquisition-related dilution.

Forecast upgrade

Mindful of McGuffie savings, the 2008 earnings forecast has risen to 19p (15p), or 31 per cent EPS growth. At 160.5p, K3 trades on modest forward multiples of 11 and 8.4, undemanding given PEG ratios of 0.3 and 0.27. Further acquisitions, particularly on the retail side of the business, should add more spice.

‘I want K3 to be a £50 million business making £7.5 million in profit by 2008,’ muses Makeham, ‘and we’re looking to do that by being a channel to market for global brands, rather than a software developer.’ To my mind, K3 has value appeal.

Earthport – time to get excited?
Earthport has a chequered history to say the least. However, a bout of balance sheet reinvigoration and a new chief executive suggests a better future lies ahead. To get a better understanding of this refashioned online transaction business, I had a chat with chairman Mike Harrison.

‘I was brought in some 21 months ago and at the time seriously considered winding up Earthport. However, I was convinced that there was value here and lead investor Millennium Global gave me their backing. Now, our turnaround is pretty much complete,’ says Harrison.

To prove his case he points to third-quarter revenues up 133 per cent over the comparable quarter last year to £280,000. Sales were also 40 per cent ahead of the second-quarter.

In addition, Harrison announces that burgeoning payment transaction volumes were flowing through the group’s systems and the integration of new clients ‘into our payments gateway’ should underpin fourth-quarter growth.

Earthport’s key asset is a global network of segregated trust accounts allowing the company to facilitate local payments for international money transfers in 190 countries in 19 currencies. In essence, Earthport acts as a single multi-currency account.

‘We run a liquidity network,’ enthuses Harrison. ‘Importantly, however, we are the only payments utility that’s a member of SWIFT (the international bank network).’ Savvy new institutional backers such as Artemis and Goldman Sachs are on board and Harrison has convinced me that the shares are an exciting growth play.

‘We’re a business with 80 to 90 per cent gross margins and our net margins can approach 60 per cent once we overcome the cost base,’ he teases. First-half financials to December revealed losses culled by 30 per cent to £2.4 million and the fact that the cash burn rate was subsiding. From what I can glean, the future looks bright.