Pick of AIM by James Crux

Technology, typically viewed as high-reward but also high-risk, is a sector often shunned in a bear market. Yet so long as the financials and fundamentals stack up, there is no sense eschewing strong performers with interesting growth stories, particularly if they are cash-generating dividend payers to boot.

In the doghouse
Two such AIM counters spring to mind. Offering exposure to the booming Asian biometrics market, yet in the doghouse for a stock overhang scenario that has been largely overplayed, is fast-growing Hong Kong-based outfit RCG Holdings.

Brought to AIM in 2004 by CEO Dr Raymond Chu, the shares have dropped to a lowly 62.75p in the current tech sell-off, which looks overdone considering that investors were more than happy to pay 150p-plus last year.

My interest in the £145 million business was recently reignited on news that the company had upped its stake in tech partner Vast Base from just under 20 per cent to 60 per cent, shelling out £27 million, all in cash, to do so.

Earnings-enhancing, the deal moves RCG meaningfully into the Chinese events and healthcare markets, through Vast Base’s anti-counterfeitingevent ticketing and patient tracking deals in the People’s Republic. Earlier this year, Vast Base bagged £29.5 million worth of work, over a five-year period, for the provision of RFID patient tags containing patients’ medical histories to 19 major hospitals in China.

Following an upbeat trading update from RCG, in which it flagged up a fantastic first half and said it would now beat full-year forecasts in the market, house broker Investec upgraded its December 2008 numbers. Investors can now expect pre-tax profits of £41.7 million from a top line of £128.6 million, giving 16.5p of earnings and placing the shares on a prospective multiple of 3.8, falling to 3.3 on 2009’s 18.9p estimate. That is ludicrously low for a company with a track record of beating analysts’ numbers, growing like wildfire and throwing off cash.

A rerating to somewhere near the house brokers’ 137p price target is overdue.

Turbo-charged appeal
Another on my radar is Turbotec Products, a profitable US-based heat transfer technology specialist valued at sub-£10 million at 77.5p, having debuted on AIM in 2006 at 85p. Given well publicised concerns regarding the US economy, some may question the wisdom of backing a small-cap, US-facing business at this time, but I feel the investment case at Turbotec is beginning to warm up.

Growth prospects are underpinned by uncertainty over global energy supply and the resultant need for practical energy-saving measures, where Turbotec’s innovative products can help. The company makes high-performance, high-quality heat exchangers and heat-transfer tubing, which it markets in the US and Canada to clients across industries such as refrigeration, marine, food and beverages, water heating and swimming pool and spa.

Full-year financials to March 2008 demonstrated resilience, revealing near 20 per cent sales growth to $28 million (£14.2 million) and profits up 70 per cent to $3.2 million (£1.62 million). Thanks to Turbotec’s balance sheet strength, MD Sunil Raina was able to raise the total dividend from 5.8c to 6.7c (3.4p) per share.

Manufacturing its wares more efficiently, to the benefit of gross margin, and on the lookout for new US facilities to service anticipated growth, I see prospects heating up for Turbotec as energy costs continue to escalate and North American consumers become more aware of the need to improve their carbon footprint. Longer term, the company sees growth prospects in the high-efficiency commercial boiler market and through the introduction of new products.

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