- Record annual pre-tax profit of $8.2mn beats forecasts
- EPS of 13.9¢ and dividend of 11.6¢
- Net cash of $7.7mn
- Step-change in profit forecast
Aim-traded Spectra Systems (SPSY:218p), a leader in banknote authentication, is set to deliver a step-change in profits over the next three years.
Bank authentication accounts for the majority of Spectra’s revenue, mainly the supply of covert security features to central banks – highly engineered material for inclusion in banknotes and sophisticated hardware to detect the materials in banknotes.
Underpinned by a contract with a long-standing central bank customer that is targeting pre-production delivery of a new generation of banknote authentication sensors in late 2024, and a maiden contribution from the recent complementary acquisition of Cartor Holdings (see below), Spectra’s current year pre-tax profit is forecast by house broker WH Ireland to increase 22 per cent to $10mn on revenue of $45mn, rising to pre-tax profit of $14mn on revenue of $56mn in 2025.
The forecasts are based on contracts in place and are not speculative, so de-risking earnings per share (EPS) estimates of 14.8¢ (11.7p) and 20.8¢ (16.5p), respectively. For instance, the hardware revenue element of the large bank contract is worth $50mn over three years and the service contract should generate annual revenue of more than $8mn.
A transformational acquisition
The acquisition of Cartor was completed shortly before the 2023 financial year-end and is also transformative for Spectra’s prospects (‘Spectra acquisition: A license to print money’, 4 December 2023).
That’s because Cartor brings many optical materials opportunities through existing sales pipelines and provides Spectra with a secure supply on a par with the two largest banknote polymer substrate suppliers: CCL Industries (CA: TCL.B) in Canada and De La Rue (DLAR) in the UK. Excess capacity at Cartor will be critical to polymer substrate manufacturing and the acquisition will increase Spectra’s margins and supply chain stability.
Importantly, dialogues with central banks have shown their desire to have another supplier of ready-to-print bespoke polymer substrate. Spectra’s management has been working with Cartor for over two years to achieve high quality conventional and machine-readable, ready-for-printing polymer substrates that include conductive layers, opacity layers and bespoke window designs as required by central banks. Moreover, Spectra has enhanced its competitive position in the market by integrating the production supply chain in order to produce FusionTM substrates for qualification by central banks and leading polymer banknote printers.
A step change in Spectra’s sensor revenues, expected to begin with the execution of the above manufacturing contract, as well as the increased opportunities for optical materials and downstream polymer substrate sales, offer significant scope for earnings upgrades as new contracts are won.
Attractive share price upside potential
True, this has not been lost on investors as the shares have delivered a total return of 69 per cent ahead since I initiated coverage (‘Alpha Research: Don’t miss out on the authentication boom’, 22 August 2022). Spectra’s share price is 13 per cent up since my December article, too.
However, there is still a decent upside to my 250p target price, which is based on price/earnings (PE) ratios of 15.5 (2025) and 12 (2026). A prospective dividend yield of 4.5 per cent for the current financial year is attractive, too. Please note that Spectra has two classes of shares and the unrestricted ones (AIM:SPSY) are the most liquid. Buy.
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