Synectics is in a growing sector Synectics supplies high-end surveillance systems to industries where surveillance is mission-critical, and often driven by regulation. Banking, gaming, transport, energy and nuclear use their systems. System is the key word here. Synectics doesn’t just install a few cameras and some recording equipment. It takes data from a range of inputs – access control, alarms, cameras, number plate recognition, even gaming machines – and pulls it together into a single system. The big software element, along with more high-end big contracts, have helped double margins to 8.8% over the last three years. Sales have grown by 35% to £83m over the same period. It’s a good record. The business is also becoming more international with 40% of sales from overseas. Synectics completed its biggest ever contract last year - a £7m deal with a Singapore gaming operator. It’s doubling efforts to develop this international sales network. Along with forging strong links with global majors like General Dynamics and Thales - partners capable of introducing lots of contract opportunities. Did Synectics overstretch itself? So, why the pause in profit growth this year? The truth is that Synectics had sweated its assets hard to generate the growth of recent years. It needs to invest in the business so it’s capable of moving smoothly into the next phase of growth. This involves building a new facility in Lincolnshire. R&D and capital expenditure are also moving ahead and will be a short-term drag on margins. As will investing in the overseas sales hubs. The company is getting bigger and needs a firm foundation to stop it falling over at some point. If this investment means a flat 2014 for profits, but the prospect of accelerated growth beyond, then the share price drop will indeed be a good buying opportunity. The overall surveillance market is worth $10bn per annum and is growing around 10% - so there is plenty of scope for Synectics in the future. And Synectics still expects to get 7-8% growth in revenues this year. But here lies the risk in my view. Management say that the timing of big projects has been pushed out and sales will be “significantly skewed” towards the second half of this year as a result. Now the real business world doesn’t always tie in nicely with the stock market’s calendar. Complex projects might take Synectics as long as a couple of years to move through the pitching process. So we shouldn’t be overly critical of an uneven order profile. However there’s a clear risk that volumes might take even longer to come through than currently hoped, at a time when overheads are rising. pro.fleetstreetpublications.co.uk/rhp-sixthrev2/ERHPQ312/ JT-Stuey Pearson
Posted on: Fri, 07 Mar 2014 10:05:01 +0000
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