Spectra Systems (AIM: SPSY)
Founded in 1996, Spectra are the experts at authentication. They started with banknotes, so at first glance this may look like a business in a declining market, as the use of physical money continues to plummet in the Europe and the US. However, Spectra has other business streams, encompassing software security and secure transactions in both gaming and electronic banking, as well as systems that monitor quality during manufacturing, by marking and tracking goods.
More recently, it has developed and patented a smartphone authentication product called TruBrand. This product fills the need for suppliers and consumers to know what they are buying, and how authentic a product is, by scanning an embedded label with their smartphone. This development represents an important diversification for the company.
In January 2019, Spectra’s shares rose nearly 6% on the news that a Chinese company had placed a six year order for the product. Zhejiang Tobacco is a Chinese cigarette giant, producing high-end cigarette brands. It has decided to use TruBrand on its packaging, to allow users to authenticate its products as genuine. This is because worldwide, tobacco is one of the most widely counterfeited products.
The development is extremely significant, because it opens the way for Spectra to prove its worth in high volume markets globally.
Tech Stock Volatility
Like many tech stocks, Spectra’s prospects and revenue can be volatile. The stock may be thinly traded at times as well – all points to bear in mind. But look at the recent stock price moves, and you’ll see that in January 2016, the stock was trading at around 19p. As of January 2019, it’s hovering around 116p. Over the past year, the return has been 48%, so some canny tech investors have done pretty well.
Spectra is an unusual stock, in that while it’s based in the US, it carried out its Initial Public Offering on the AIM market in London, raising $23m. Why? Part of the reason was to diversify the shareholder base and bring in London investors. But it’s also got a close business relationship with De La Rue, the banknote company, based in the UK.
A series of positive news stories over the past year have included higher than expected profit and revenue, and business wins from the US State Lottery and a G20 Central Bank.
For the year ended December 2017, Spectra increased revenue over the previous year, from $11.12m to $12.17m. However operating profit was a record for the company, at $3.03m, compared to $1.09m the year before.
The price earnings ratio (P.E) is currently 21 – so the shares aren’t exactly a giveaway. But they are paying a dividend (3.79%), unlike many tech companies.
Further Orders Boost Profits
December 18’s trading update was very positive, with a G7 central bank (the company doesn’t say which) giving extra orders for high performance phosphorus, used for security. The expected boost to Spectra’s profits from this unexpected windfall, pushed the shares up 7.4%.
The authentication of goods in a global marketplace is a growing business. There is huge consumer demand for traceability in food, for example, and growing concern over fake and dangerous goods. Governments may also be interested in the technology, for tracing and tracking taxable cargos without physical checks. The company’s products are well placed to take advantage of the Internet of Things narrative.
The tie-up with Zhejiang Tobacco is very significant – both because it gives entry to the Chinese premium brands market, and because it gives Spectra credibility in the area of a high volume manufactured consumer goods.
However, investors should proceed with caution – much of the good news is currently in the price, and future share price growth may depend on further business wins, and the development of market leading products. With China a clear growth market, US trade sanctions and Chinese retaliation, are a cloud on the horizon.
Tech stocks are in any case, notoriously volatile, and at times, trading can be thin. So while the outlook seems promising, don’t bet the farm.