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Focus on OMG for growth

The imaging technology group has improved its growth prospects, yet its shares trade cheaply
March 3, 2016

Following two disposals and the reorganisation of a loss-making business, cash-rich imaging technology group OMG (OMG) is focused on increasing shareholder value by boosting the quality of its earnings and focusing on the latent value of its intellectual property (IP). We feel the share price fails to fully reflect the attractions of the strategy and the potential for further returns of capital following a string of special dividends.

IC TIP: Buy at 46p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Accelerating profit and margin growth
  • Focusing on value of intellectual property
  • Shares are cheaply rated
  • Penchant for special dividends
Bear points
  • Restructuring could be disruptive
  • Modest top-line growth

Oxford Metrics Group targets the entertainment, engineering, life sciences and consumer electronics markets and counts Ford, Sony and Transport for London among its customers. Management has reshaped the company to focus on higher margin, more reliable work. Indeed, it sold defence software business 2d3 for $25m (£16.8m) to Boeing subsidiary Institu and disposed of US business House of Moves for £0.8m in the last financial year. Those deals have reduced the volatility of revenues and profits and boosted cash generation. They've also helped the company return more than £15m through three special dividend payments.

 

 

OMG's two key divisions are now its market-leading Vicon motion-capture business, which accounted for two-thirds of last year's continuing revenues and a similar proportion of profits, and its Yotta infrastructure-management software operation. Vicon's cameras were used in the filming of blockbusters such as Avengers Assemble and American Sniper, as well as in video games and other digital media. They're also deployed to analyse the gait of patients with cerebral palsy and athletes' movements. Widening gross margins and diligent cost control meant the division's adjusted pre-tax profits rose 6 per cent last year, and its latest camera, Vicon Vantage, should underpin further growth this year.

Meanwhile, Yotta provides surveying and analytics software to help organisations keep an eye on motorways and other infrastructure assets. Its ongoing transition to a software as a service (SAAS) model - which emphasises subscription products - drove recurring revenues up a third last year to £3.6m. It also signed major customers such as Lincolnshire and Hertfordshire county councils and inked a two-year contract with Highways England for Horizons, its visualised asset management platform. Strong trading and partnering with international distributors fuelled record sales and pre-tax profits in the period.

While the valuation of OMG's shares hinges on Vicon and Yotta, the group's recently restructured Life business could also provide upside. The loss-making division previously manufactured and sold Autographer wearable cameras, but management has stripped out costs and refocused on licensing out its technology instead. The division recently won its first engineering engagements with two global consumer electronics companies, which could pave the way for licensing agreements.

While the company has handed back significant amounts to shareholders since 2015 through three special dividends, the balance sheet remains attractive, with broker N+1 Singer forecasting net cash of £7.1m at the end of September 2016, rising to £11.1m in 2017. That suggests there could be scope for further returns of capital above the base dividend of 0.9p a share.

OMG (OMG)
ORD PRICE:46pMARKET VALUE:£55m
TOUCH:44.5-47p12M HIGH / LOW:47p27p
FORWARD DIVIDEND YIELD:2.0%FORWARD PE RATIO:13
NET ASSET VALUE:24p*NET CASH:£11.7m

Year to 30 SepTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)**
201327.51.62.20.4
201425.60.0-0.10.5
201525.82.41.810.2
2016**27.34.42.94.5
2017**29.35.43.50.9
% change+7+23+21-80

Normal market size: 5,000

Market makers: 4

Beta: 0.22

*Includes intangible assets of £12.8m, or 11p a share

**N+1 Singer forecasts, adjusted PTP and EPS figures, DPS includes special dividends of 9.5p in 2015 and 3.75p in 2016