Balance sheet strength and the prospect of improved profitability could make for an interesting long-term ride.
If you shouldn't buy what you don't understand, then many of us would go nowhere near OMG (LSE: OMG). But it still looks an interesting prospect.
The company provides "image understanding" products for the entertainment, defence, life science and engineering industries. So, for example, its products could capture the movements of sportsmen for video games or for improving team performance, or of rehab patients and animals (for medical, life science and research industries) or virtual reality displays (for engineering and development). Based in Oxford OMG also has offices in California and Colorado and has customers in over 50 countries.
There are three companies in the group: Vicon, 2d3, and Yotta, each specialising in different areas. Of these, US-based Vicon which manufactures motion capture cameras for the film, computer games and life sciences industries is the biggest. Yotta, meanwhile, uses similar technology to provide highway authorities with complete visual records of their networks. Yotta is loss-making at the moment, but provides recurring revenues, whilst the defence business 2D3, makes topographical-tracking technology for unmanned aerial vehicles. The company has to be a little cagey about information relating to the 2D3 business, but has high hopes for future growth.
A sorry tale
OMG's share price chart tells a sorry tale. The shares peaked two years ago at over 67p, but it's been more or less downhill all the way since to the current level of 20.75p, which values the group at just £13.6m.
The latest interim results to the end of March revealed a decline in first-half pre-tax profit as customers delayed sales and U.S. dollar weakness affected operations. The company made a pre-tax profit, after restructuring costs and foreign exchange gains, of £900k on sales of £13.6m. The overall tone was one of cautious optimism -- and justifiably so. The fact that group revenues rose 7% on the same period last year was no mean feat given the economic backdrop. OMG continued to win new business, particularly in China, but remained cautious overall.
Yotta USA, though, was badly affected by the economic slowdown, but management were confident business will pick up in the second half. Yotta UK also suffered due to increased competition and poor weather, but did win a significant new contract in Newcastle for a footway survey and an extension to a contract with Cheshire Country Council, Yotta's largest customer. Yotta also won business in Hong Kong and Holland during the period.
Based on the first half alone, the shares are on a price-to-earnings ratio of 11.8. Last year's earnings places them on a P/E of a little less. This isn't bad, but nor is it screamingly cheap in recession conditions. So what's the big attraction?
The attraction
Strength in the balance sheet, the potential for future growth and the defensive posture taken by the group during the downturn make OMG an interesting looking investment for me over the long term. Overall net asset value was £18.4m at the last count, with net current assets of over £8m and £2.1m in cash. The company is also making efforts to reduce costs and felt confident enough to maintain an interim dividend of 0.115 pence a share.
The 2d3 division has the potential for rapid growth and the company has been steadily growing turnover and profitability over the years, but this is not reflected in its share price performance; quite the contrary in fact. The company's management has demonstrated its trustworthiness and its balance of defensive and potential growth markets and defiant performance during the downturn help give investors confidence.
It looks like it could be an interesting few years ahead for investors who crave a little excitement.
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