Gamble of the week: 3D film-maker set to soar
By
Paul Hill Feb 05, 2010
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In 2009, microcap stock OMG achieved sales of £26.2m from
its three divisions, Vicon (70%), Yotta (26%) and 2d3 (4%). All operate in
expanding niches, supplying innovative products that analyse moving images. The
oldest, Vicon, sells advanced motion capture technology to gaming companies and
Hollywood studios. This has been used in
blockbuster films such as Harry Potter, GI Joe and Spiderman. Its equipment is
also used in the less cyclical world of medicine and sports science, where in
order to improve performance it records in minute detail the movement of
athletes, children with cerebral palsy and people under rehabilitation.
Vicon recently signed a licensing agreement with
Microsoft to incorporate their SenseCam technology into its exciting new Revue
product. This camera is worn around a person's neck, recording everything they
do and serving as a memory aid for patients suffering from Alzheimer's disease.
And with one in 14 of Britain's
over-65s suffering from dementia, the potential for the device is immense –
both in the UK
and overseas.
OMG plc (Aim: OMG)
The other two fledgling units are currently loss-making
as a result of investing in their cutting-edge technologies. Yotta's clever
systems allow highway authorities to gauge the state of their roads by driving
a mounted camera around them, rather than having to send someone out with a
trundle wheel and a mobile phone. And although one of its revenue streams was
effectively wiped out by the introduction of Google's free Street View service,
it has still made good progress. For example, in December it bagged a four-year
deal, worth between £4m and £5m, from the Welsh Assembly, to carry out road
condition surveys across its network.
The last division, 2d3, serves the booming unmanned
aircraft and aerial surveillance space. It helps provide the British and
American armed forces with state-of-the-art intelligence gathering in war-zones
around the world.
The big issue for investors, given the tricky trading
environment, is when the company will realise its true potential. I think it
will take until 2012. But by then it will be a money-spinner. Indeed, I would
expect the experienced management team to increase revenues and Ebita to £30m
and £3.0m by 2012. On this basis, I rate the company on ten-times its Ebita.
After adjusting for the £2.8m in net cash and discounting back at 12%, I get a
fair value of 39p per share.
There are, nonetheless, a few potential hitches. Firstly,
being a relatively small business, OMG carries more risk than something larger
and more diversified. It is also exposed to a cocktail of foreign-exchange
risks (74% of turnover), lumpy orders, margin pressure and the dreaded economic
double dip. That said, the firm is profitable, well-financed and pays a
dividend. Following the success of the film Avatar, it also offers investors
the chance to profit from the resurgence of three-dimensional films.
Recommendation: SPECULATIVE BUY at 20p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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