The tech sector is littered with micro-cap gems that are being overlooked as investors climb over one another to get a piece of the next big thing off the IPO conveyor belt.
A potential diamond in the rough is SerVision (LON:SEV), an Israeli firm listed on AIM. It has developed ground breaking mobile video technology that allows CCTV to be streamed direct and live from moving vehicles.
Its products are already being used by G4S, Brinks, Loomis and the Royal Mail in their respective cash handling operations.
In Israel its devices are installed on buses and it is understood there is to be a trial in the UK with FirstGroup, one of the nation’s largest transport companies.
However, the applications are endless: SerVision video recording and transmission systems could be used by grocery delivery firms to combat shrinkage (a euphemism for stealing), or for security purposes when carrying high value cargoes such as tobacco.
The portability of CCTV systems has been limited, not by a device’s size, but by the ability to transmit over cellular networks using mobile phones.
Digital video streams typically require extensive bandwidth provided by office LANs or home broadband connections.
So, one of the key challenges SerVision was faced with was how to transmit high-quality video over all types of internet protocol (IP) networks.
It has done this by developing advanced video handling technologies.
Without getting too technical, this requires innovative compression techniques that make it possible to transmit very high-quality video recordings over narrow bandwidths.
As a result, video gateways can stream smooth video over cellular network links, so remote users can view live feeds in real-time via their PC, laptop or smart phone.
Like many of the advances that emanate from Israel, it was developed by the military.
The entrepreneur spearheading its commercial application is chairman Gidon Tahan, a 30-year veteran of the tech sector. He scored a notable success in 1999 selling his cable telephony business for US$93mln.
He is no doubt hoping to repeat the magic.
The opportunity is two-fold. The mobile video platform appears to be getting a lot of traction with firms such as G4S and Brinks that need some in-cab presence, and it is becoming obvious SerVision is one of the only solutions out there.
Secondly, the current share price – 2.35p and down from its 90p listing price – suggests this business is priced for failure. So, even some modest success could move the dial significantly.
The recent results reveal the group to be loss-making, but in the midst of a transformation as it switched its business from fixed applications to mobile.
This will be account for the majority of revenue from here on in.
Also, the group is reported to be moving from selling the kit, which might net it £1mln from a £10mln contract, to a revenue sharing model that would see it rake in significantly more.
The key will be working with the resellers to land these large contracts.
The operational gearing of this business is such that a couple of chunky contract wins could radically alter SerVision’s financial performance.
A back of the envelope calculation suggests that revenues of US$6mln would deliver underlying earnings (EBITDA) of U$1mln, while a US$1mln increase in the top line would add another US$600,000 to operating profits.
Might SerVision achieve that sort of success?
It is not inconceivable, particularly if its products are starting to gain the sort of traction being talked about.
The group is understood to be collaborating with Israel’s largest CCTV company.
This suggests the senior partner doesn’t possess the intellectual property developed by SerVision and it sees the technology as very useful and potentially valuable.
The question then is: does this large CCTV firm spend five years developing its own expertise in-house, or acquire it? I leave you to decide on that one.
Now, those who followed the group will know it was listed in 2004 at 90p. There is an argument to be made that SerVision did what many others in the sector have done before it – joined the public markets before it was ready.
It has survived and is now showing signs of delivering on its early promise perhaps – albeit belatedly.
With stocks such as SerVision it is always worth bearing in mind the recurrent need for finance. It is almost certain the group will at some point need to replenish its coffers.
How it does this will require some creative thinking, particularly
with the current share price where it is, as making any cash call could be hugely dilutive.
But then there are always risks to investing in growth stocks – the question is whether the potential upside outweighs them.