Pick of AIM by James Crux

There is value to be unlocked within the small-cap security sector, where stirrings at two particular AIM players excite

Providing electronic and physical security systems focused on personal security and asset safety, Newmark Security, chaired by veteran Maurice Dwek, co-founder of Dwek, London-listed in the 1970s, is a niche business on the verge of nice growth.

Through asset protection arm Safetell, Newmark supplies rising security screens that protect bank and building society staff, while its electronic operation, Grosvenor, provides access control and security management.

Annual numbers to April showed sales lifted 6.5 per cent to £13.8 million and profits increased from just under  £1.5 million to around £1.7 million, with an 18 per cent sales surge within asset protection more than making up for weakness in the electronic arm.

What makes Newmark anything but a security steady-eddy is its entry, through the acquisition of 60 per cent of ATM, into the Cash In Transit (CIT) deliveries and  cash machine protection market. Intriguingly, ATM has developed a product, in conjunction with CIT delivery giant Loomis, that beats the existing method, using ink to stain banknotes, out of sight.

Application of a glue causes a chemical reaction when it comes into contact with the notes, degrading the cash and rendering it useless. Finance director Brian Beecraft assures me that ‘the market for it is enormous’ and believes that demand from transit companies could spiral since attacks on staff are increasing.

For April 2011, Square Mile number crunchers see profits pushing up to £1.8 million, ahead of growth to £2 million by 2012 as revenue builds to £14.7 million. Estimated earnings of 0.32p place the dividend-paying shares – currently 1.75p, giving the group a £7.9 million AIM tag – on a forward p/e of 5.5 times, a significant discount to peers.

This rating reflects size risk as well as the threat of order delays amid current inclement economic climes. Nevertheless, Newmark looks unfairly unloved, given its profitability and exciting investment in ATM protection. The shares are a long-term lock-away.

Quadnetics – a safe bet under Shepherd

Quadnetics, whose shares I urged buying and stashing away at 160.5p here last year, is looking an increasingly attractive investment under the guidance of CEO John Shepherd. Valued on AIM at £30.6 million at 174p per share, the international video surveillance technology and security networks play, whose systems protect everything from prisons  transport infrastructure and oil and gas facilities, is seeing the benefits of its restructuring and fostering margin improvement through a focus on protecting ‘critical infrastructure in niche markets’.

Interims for the 12 months to May – the company is moving to a November year-end – showed 27 per cent PBT growth to £2.3 million, despite a drop in sales to £62.7 million (£2009: £70.7 million). And momentum is with the business, with Quadnetics enjoying marked upturn in its second half, buoyed by improved activity in the US casinos market.

On the domestic front, Shepherd even espies opportunity in UK government spending cuts, since his company can offer technologically advanced and cost-effective ‘consolidated’ surveillance system solutions to cash-strapped local authorities.

My confidence in the Quadnetics story continues to grow, with its order book having swelled by 61 per cent to £27.7 million over the past year. And investors should now be looking for an advance in pre-tax profits from £1.5 million to £3.2 million for the year to November, as sales skip higher to £67.6 million (2009: £64.7 million). By November 2011, turnover should hit £75 million, with profits of £3.7 million.

The enterprise value of Quadnetics, which boasts £4.8 million of net cash in the coffers, looks ungenerous at sub-£26 million and the shares, swapping hands for less than 12 times forecast earnings of 15.3p and offering a 4 per cent yield, represent really good value. Analysts think they can reach 220p, so the upside potential is significant.