The Investment Column: Detica looks programmed for long-term growth

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The Independent Online

Our view: Buy

Share price: 1,268p (+49p)

Detica, a specialist IT services provider, is a serial outperformer and 2006 results proved that point. Revenue leapt 45 per cent to £101.5m while profit before tax and exceptional items was 30 per cent higher at £11.8m, well above average market expectations. The well-run company also raised its dividend by 27 per cent to 8p, a solid return for a mid-cap technology player.

The group won plaudits during the technology downturn as it continued to grow steadily while larger competitors struggled to keep pace. Its strength was a result of its exposure to government contracts that are less risky than private sector deals, where spending can be volatile. Detica provides services to the Customs authorities, but it is in the burgeoning national security market where the company has excelled. Last year, Detica set up an operation in the US to take advantage of increased spending on national security by the US government.

Pessimists assumed that once technology spending picked up again, Detica's government-based revenue growth would pale in comparison to its IT services rivals with private sector exposure. Yet in the 2005-06 financial year, its government-derived revenue jumped by 50 per cent, accounting for more than two-thirds of Detica's overall revenue. Meanwhile, its commercial revenue leapt 34 per cent.

Yet it wasn't all good news this time around. Margins slipped while the company's new internet filtering product, Streamshield, has proved slow to get off the ground. Detica has now decided to look for an external investor to assist in selling and marketing the Stream-shield product. More persuasive would be if Detica signed up a large internet company such as BT, Tiscali or Orange to demonstrate the value of Streamshield to both investors and, more importantly, consumers.

With growth in its national security operations abundant and its commercial operations growing steadily, Detica remains a long-term buy, particularly if the bet on Streamshield pays off.

Chloride

Our view: Hold

Share price: 100p (- .75p)

Chloride provides back-up power systems that are fast becoming a necessity to modern businesses. At a time when the world increasingly operates 24 hours a day, seven days a week, the quality and reliability of power delivery is on an alarmingly downward trend. Even in developed economies, blackouts are common and networks are creaking under the strain of delivering uninterrupted power.

The biggest market for power protection is in the United States, where there is no national electricity grid and extreme weather conditions have forced companies to invest heavily in backup systems. The market is fragmented, with four companies taking up 50 per cent of the global market, of which Chloride is the smallest, with the balance taken up by a myriad of smaller operators.

Chloride counts the likes of Heathrow airport's air traffic control and the trading floors at several investment banks among its customers, and is increasingly looking to expand its business throughout the growing economies of South-east Asia and India, where the growing call-centre industry cannot rely on local power sources. The company reported full-year, pre-tax profits of £15.6m, up 55 per cent from 2005, as sales grew. The order book looks healthy, and margins are on the increase in its lucrative after-sales support and maintenance business.

While the shares are not cheap, trading on a forward price to earnings multiple of almost 19 times, there will be upgrades to forecasts on the back of these results. Worth holding.

Theo Fennell

Our view: Buy

Share price: 52p (+13p)

Theo Fennell sells diamond-encrusted bling by the bucketloads to stars including the Beckhams.

Richard Northcott, the chairman who is also the company's biggest backer with a 29 per cent stake, wants to change all that by bringing in an outside investor who will help to fund his ambitious plans for world domination. Theo Fennell already has bigger sales than Garrards, Asprey and De Beers' retail arm and has set its sights on none other than Bulgari, the Italian king of all things sparkly.

Yesterday the AIM-listed company reported a seven-fold increase in pre-tax profits to £732,451 on sales up 20 per cent at £19.4m. It sells pieces for £50,000-plus a pop. The group operates from a mixture of company-owned stores, concessions and franchises, and also has a wholesale business selling into independents.

It is hoping to tap the Russian petrodollar with a new wholesale agreement with a Moscow jeweller, following on from its franchise stores in Dubai and Hong Kong. Seymour Pierce, its broker, reckons this will help profits will increase to £1.1m this year and £1.48m the next.

Talks with various potential strategic investors are continuing, but with so much of the group tightly held - designer Theo himself has a 17 per cent stake - the sticking point is price. Compared with some of the group's more outlandish creations, the shares are a steal. Buy.

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