07/02/2006
‘We have a tarnished name and a chequered history, but today we are a fundamentally different and a better business.’ These words belong to Mark Turnage, chief executive of Applied Optical Technologies, the cash-rich anti-counterfeiting outfit whose recent move into profits at the interim stage testifies to the veracity of Turnage’s claims.
The Tyne and Wear based group – which also sports an exciting operation in the US – provides technology to thwart counterfeiting for four growth areas of this key market.
In ‘brand protection’, Applied supplies sophisticated holograms and laminates to assist major US sports leagues protect their merchandise (they are sewn onto garments or pressed onto products like baseball bats and mugs). To the likes of Pfizer it has products that protect the packaging of their drugs and for American Express it secures travellers’ cheques.
In banknotes and high security documents, the company is the world’s main provider of security solutions for central banks and state security printers in the US, Europe, Asia and Russia.
In the ‘ID technology’ field, Applied offers solutions that protect passports, while its joint venture arm, 3dcd, provides anti-counterfeiting properties for CDs and DVDs. One
of the main clients of 3dcd is the mighty Microsoft.
Most of the troubles in Applied’s history can be dated back to 2000, in the run up to the launch of the euro, when Applied tied up with Nasdaq-listed Optical Security to make anti-counterfeiting foils for the new currency. To cut a long-story short, the technology didn’t work, and by the time it did, a German rival had nipped in and stolen the show.
All Applied was left with was a few financial scraps from a once-lucrative table.
Unsurprisingly, restructurings, losses and share price falls ensued.
Despite the fact that the group was actually making healthy progress in the US, an operation that was throwing off cash and enabling Applied to strengthen positions in key markets, total group losses hit a staggering £19 million in 2003 and a less embarrassing £1.5 million in 2004.
Says Turnage: ‘By 2004, we decided to exit from all euro banknote and all non-security business and conduct a thorough restructuring of our UK operations.’ The net result of this was a substantial up-tick in losses to £6 million for 2005 after goodwill and exceptional charges.
The fruits of this last wave of changes were writ large all over the interim figures for the period to June when losses of £1.19 million were transformed into pre-tax profits of £933,000 off a top-line of £13 million. The re-jigged UK operations moving into the black aided this performance. Throughout the restructuring, core accounts were retained, and new contracts won for the provision of excise stamps; encouragingly, a major European passport programme contract has been extended and Applied reported bumper growth in the US.
A decline in the contribution from 3dcd, in a lull before this year’s launch by Microsoft of its new Vista software, should soon reverse. ‘Vista is the largest product launch in Microsoft’s history,’ teases Turnage.
A first-half cash inflow of almost £1.9 million took cash to £5.7 million or 11p-a share – and all the (negative) trends in the market point to more business tumbling in.
Counterfeiting, oft used by terrorist groups, is a growing crime. High-quality scanners and copiers are making document forgery easier, and the internet has given counterfeiters unprecedented access to information. It is estimated that between five and eight per cent of all world trade is now in counterfeit goods, with globalisation only adding to the problem. Losses to the clothing and footwear, pharmaceutical and software industries stand at billions of dollars.
For the full year, Applied should move further into the black. House analyst Peter Cooper of Brewin Dolphin predicts pre-tax profits of £1.7 million, placing the shares on a forward p/e ratio of 18.5, below the sector average. Another £1 million is forecast to drop through to the bottom line in 2007, giving an undemanding forward rating of 11.5. Applied, which traded above 550p-a-share six years ago, looks a steal at current levels.
| AIM | £12.54m |
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1.00p
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