Sagentia looks significantly oversold

On account of over-caution or anomaly, technology consultant Sagentia, an adviser to blue-chips including Vodafone and AstraZeneca, is valued at a significant discount to net assets.

Sold down from 45p to 16.5p since transferring its Swiss domicile to the UK and its full listing to AIM, the company’s shares are priced at a 75 per cent discount to its 71.9p of shareholders funds. Most of the value of these assets is based on its ownership of the freehold land and buildings of its Cambridge headquarters, lately valued at £15.3 million, against which the company has a £9 million mortgage. Yet, with a cash pile of £5.3 million, net debt at December’s year-end amounted to a much-reduced £4.2 million, leaving the present market price tag looking undercooked.

Until last year, the company had operated as a technology incubator alongside its consultancy business, spinning out high-tech start-ups into its ‘venturing portfolio’. Last year, new chief executive Dr Alistair Brown changed the company’s focus ‘from earnings to equity’, with a plan to sell off this portfolio, concentrate on consultancy and exploit its own intellectual property.

A £2 million fall in the ‘fair value’ of this portfolio last year, combined with the £589,000 cost of re-domiciliation, meant Sagentia lost £2.2 million pre-tax. However, excluding these residual investments, the new core business, technology consulting and intellectual property (IP), performed admirably.

After a significant recruitment drive last year, through which Brown added the ‘content-rich people’ needed to dream up new ideas and sell them to clients, revenues increased 27 per cent to £26.6 million, driving gross profits 280 per cent higher to £1.9 million. ‘The recruitment campaign has allowed us to concentrate much more on sales and marketing,’ says Brown, ‘and we have seen continuing demand for our services.’

Indeed, there is demand for Sagentia’s technology consulting skills – provided through offices in the UK, the US, Germany, Hong Kong and Sweden – from many industries. Vodafone came to Sagentia with an open brief to devise a mobile means of providing financial services to the developing world’s ‘unbanked’, while AstraZeneca requested an automated drug identification system. Sagentia delivered the goods and, as well as rolling out Vodafone’s M-PESA mobile money transfer service in Kenya, Tanzania and Afghanistan, other projects completed during the year included a robotic camera holder for use in keyhole surgery and a colour-balancing surgical light.

The robotic camera won an award form the Society of Laparoendoscopic Surgeons, while the company’s innovative power-shower took home a Queen’s Award for Innovation.

Under its IP-exploitation banner, Sagentia receives £100,000 a year from licensing out its technology to AstraZeneca, and last year another idea was taken up by US water-meter giant Master Meter, which signed an exclusive licence deal for the use of an automatic meter-reading technology expected to generate up to $4.5 million (£3.1 million) in royalties.

Sagentia has set up a self-styled ‘IP exec’ to sift through its myriad of money-spinning ideas and take the best ones to potential clients. The IP pipeline includes sensors for the car industry and a special ‘nanoheat’ technology that could be used in a variety of applications.

Brown insists demand remains robust and recounts that, compared with the last time the country entered recession, when his sales department rang with the sound of silence, ‘this time the phones are still ringing’.

‘Innovation has stayed at the top of the company agendas,’ he says, ‘They are conservative about defending margins and a lot of clients are talking about positioning themselves for the end of the recession and leapfrogging those competitors that don’t innovate.’

Underpinned by property assets, more than covering all debt, analysts forecast strong growth at Sagentia, set to deliver adjusted profits of £1.3 million and 4.5p of earnings in 2009. A return to confidence among investors could result in a considerable rerating.