No Pain, No Gain: Datacash taps into switch to credit cards with pins

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The Independent Online

A new and, some readers may think, surprising recruit to the No Pain, No Gain portfolio. I have descended on another hi-tech company, an area an old Luddite like me usually treats with extreme disdain. Indeed, on two earlier occasions when I ventured into what we used to call the new economy, I was left with a liberal amount of old-fashioned egg on my face. In the madcap internet boom I was tempted to buy a couple of not-to-be-missed hot shots, City of London and Lynx. Although not, like so many other high-flyers of the day, complete disasters, the portfolio escaped only after suffering wounding losses.

Never again, I vowed. Hi-tech was out. In future I would only invest in businesses I understood. Well, that decision did not last long. Last year, tempted by the presence of Bob Holt, the man who created the remarkably successful Mears maintenance services group, I alighted on little, highly speculative Wyatt, an online risk consultancy. The portfolio, I reasoned, had fared extremely well from Mears; so let's see if the Holt magic could be repeated. Then two months ago I added, a hi-tech printer. Now I find myself beguiled by another online player, Datacash Group. Perhaps this battered old pro is at last getting with it - or heading for another fall.

I do not pretend to understand the intricacies of Datacash's technology. But I think I have a fair appreciation of the end products. And, perhaps, more importantly, the potential lurking at the group.

It is not, like many of its peers, a blue-sky dream. It has considerable substance already. Its big hope - and, of course, the gamble which could transform its prospects - is that its chip and pin technology will make the impact it expects. But even if it does not Datacash, headed by David Bailey, still has a sound and growing business.

Until now it has relied upon such operations as providing electronic services that enable retailers to accept and settle credit card transactions. It's a growing enterprise with clear spin-offs. Last year it made a pre-tax loss of £671,000 against £2.4m the year before, but after adjustments for exceptional items and amortisation, it can actually claim to have recorded a £735,000 profit. For this year Guy Hewett, an analyst at the stockbroker Investec, expects a pre-tax profit of £1.4m with £2.2m in sight for the following year. The Hewett predictions, however, make no allowance for the group's exciting chip and pin involvement. It's the new credit card system that is being piloted and is due to go nationwide in January. Cardholders will then have to adopt secret pin numbers when they use their cards, to reduce fraud. Retailers who do not accept the new system could find themselves responsible for any losses from swindles.

Datacash has struck a relationship with the computer giant IBM to tap into the British market. It is not aiming at major retailers. They have the resources to install the costly chip and pin system themselves. And corner shops are not a priority. It is the medium-sized chains that are being targeted. By offering what it believes to be a cheap, complete solution the Datacash consortium has high hopes it can win the middle ground, where it could have an unchallenged run.

There is no doubt that chip and pin will be the next system to encroach on our lives. To reduce their credit risk, the card behemoths have commanded its introduction. The rest of us, from top retailer to humble consumer, will have to comply. Little Datacash, capitalised at £34m, could be one of the major beneficiaries from the enforced switch.

So far, its chip and pin campaign has not produced any customers but it has only been on the road for a few weeks. And it would not take many orders to bring about a staggering uplift to the Investec forecasts. Even so, I must stress the shares long ago left the bargain basement. They have enjoyed a strong run and at 77.5p are selling at a heady 24 times this year's forecast earnings. On such a fancy rating they must be something of a gamble - they are certainly not for the proverbial widows and orphans. But with £1.5m in the bank, the enticing prospects of its current online business and the tantalising promise of chip and pin, I feel Datacash represents a punt well worth taking.

Finally Mears: its order book has mushroomed to £550m; indeed this former portfolio constituent has clinched contracts running into 2018. Profits last year were £4.7m, and this year they should be around £5.75m. The shares are highly rated but still attract buyers.

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