Buy Servelec for ace returns

Servelec's health and social care business provides patient administration and electronic record systems to mental, community and social care providers. Demand is benefiting from a technology overhaul by the NHS as well as budgetary and regulatory pressures on healthcare providers. NHS trusts are currently exiting the National Programme for IT, giving them the autonomy to choose their systems provider. Servelec has won 20 of the 36 contracts available in London and snagged several outside the capital. Fulfilling those orders should drive up divisional profits this year. Moreover, the business could land several more contracts during a similar systems 'refresh' in the north of England this year.

Servelec has also boosted the division's growth rate and expanded its product range through acquisitions. Buying social care software group CoreLogic helped it more than double the value of its order bank to £49m last year. It also plans to integrate the bed management and patient flow software of recently acquired Aura into its flagship Rio and Oceano products. That should help it tap into the industry trend of 'connected healthcare' by helping hospital staff, clinicians and social workers share patient data.

Servelec's automation division, which accounted for about 70 per cent of revenue last year and half of profit, makes monitoring, disaster protection and emergency shutdown systems for utility companies. It has benefited from stricter safety regulations in the industry - part of the fallout from Fukushima and Deepwater Horizon - and looks poised to prosper from AMP6.

Last year, automation sales rose 29 per cent, helped by a full-year contribution from its late-2013 takeover of Semaphore, which provides remote monitoring equipment used by Belgian railways, French gas networks and UK airports. Semaphore has benefited from energy and utilities companies' mounting interest in using infrastructure data to lower costs, optimise investment and improve safety and network efficiency. Servelec also positioned itself to profit from a £115m to £120m market opportunity from AMP6, the UK water industry's five-year investment programme that began in April, by offering flow anomaly detection software. It has already agreed product trials with Wessex Water and Severn Trent Water.

Prospects are underpinned by Servelec's order bank, which swelled 63 per cent last year to £63m. Taking account of broker Investec's forecasts of cash per share of 22p by the end of 2015 and 39p 12 months later, the shares are priced at a cash-adjusted 15 times 2015 forecast EPS, dropping to just 12 times in 2016. That looks very low compared with an average PE rating for the international peer group of 19 based on next 12-month consensus earnings forecasts.