SMALLER COMPANIES : Crystal-gazing at IOC's future

Trying to judge whether a small, hi-tech firm is fairly valued by the market is an uncertain business, writes Richard Phillips.

Normal rules go out of the window. Companies can trade on fancy multiples, such as 100 times sales, and still be a bargain. Other businesses may get the brush-off from investors, and have to prove themselves over a longer period of time, yet still come good in the end. And, of course, plenty come a cropper. When that happens, it is no use moaning. The difference between triumph and disaster can be no more than the width of a cigarette paper in the sector.

One credo investors must follow is to be very cautious. It helps, too, if you have some genuine interest in, and knowledge of, the sector in which a company hopes to make its fortune.

With these provisos borne in mind, AIM-listed Integrated Optical Components offers some distinctive attractions. Placed at 80p a share in March last year, it currently sits at 159.5p. Last week it announced interim results, with pre-tax profits almost doubled to pounds 411,000 from pounds 208,000. Sales advanced to pounds 3.25m from pounds 1.38m.

And at least IOC makes a profit; many of its peers have yet to earn shareholders a penny, and may not do so in many cases for years to come.

Against that, IOC is valued at the astronomical figure of pounds 39m, or 12 times sales - roughly the same multiple as at the flotation. So the market has done nothing to let the price move closer to more normal valuations. As to its price/earnings ratio, it is anyone's guess where earnings per share could come in next year. On earnings of 1.5p - down 12 per cent from the previous year - the shares trade on a historical ratio of 106 times. If earnings can grow, say, 20 per cent by next year, that leaves the shares on a forward multiple of 88 times. Heady stuff.

So what is all the excitement about? IOC was set up by its three founders after they left GEC in 1991. It was at GEC they lit on the commercial potential of lithium niobate, a crystal which can be used to make microchips.

The microchips IOC makes are used as modulator switches for transmitting digital signals down fibre-optic cables. Lithium niobate chips can send signals further and more clearly than the conventional manner, through switched laser signals.

Despite being a tiny company, IOC aims to sign up the world's biggest telecommunications companies to its products. So far it has three major telecoms firms on board, and there should be more to come.

The company has already encountered teething problems. A production problem lost it pounds 250,000 in sales. IOC says the matter has been dealt with. But you can be sure of further troubles ahead in a situation like this. Even so, the shares should prove to be an exciting item at the more speculative end of a portfolio.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there