I have pinched Luke Heron's article off Unquoted (with his permission) to post here as it's far better than anything I could write.

A Special Situation

Spectrum Technologies


As I compose this latest masterpiece aimed at uncovering the value in another ludicrously overlooked situation, news has just broken that Saddam Hussein has been captured. Apart from the obvious sense of jubilation that I think many will be feeling, Saddams capture actually contributes additional relevance to the company I want to discuss. You see, this little-but-simultaneously-large technology outfit is a world leader in its field, but has suffered at the hands of various world events seemingly out of its control.

Like many companies involved in servicing the aerospace market, OFEX traded Spectrum Technologies has been one of the numerous victims of a falling demand for its core products, undoubtedly a bi-product of September 11th 2001. The global meltdown in the aerospace industry was exacerbated by the outbreak of SARS combined with the impact of the war in Iraq. Both these events were particularly unfortunate for an industry that as of mid-2002 was actually showing remarkably encouraging signs of recovery, acknowledged, albeit in passing, by Spectrums Chairman Peter Dickinson in its interim figures released in September.

One of my favourite films of all-time is Oliver Stones Wall Street. This is so for many reasons, not least because the relationships, mannerisms, slang and general story line are completely faultless. The story is based on the insider trading activities of the central character, Gordon Gekko and his curiously recruited sidekick, Bud Fox. Whilst Gekko is a fictional character, the events of the story are loosely based on the infamous stock and real estate legend Ivan Boesky. The reason I bring this up is not to impress you with my fantastic, dare I say unrivalled knowledge of stock market and movie related trivia, but because the central character of this movie makes one of the keenest observations you will ever hear. Albeit a slightly concerning admission, Gekko tells his young broker, Information is the most valuable commodity I know of. The public is out there throwing darts at a board, whereas I bet on sure things. Unfortunately for the Unquoted readership, this is not an indication that what follows is privileged or even insider information. So why is this relevant to Spectrum? Well in truth it isnt directly related to my investment, but I bring it to your attention because unlike many apparently good value situations, Spectrums management is notoriously difficult to extract any specific information from. However if you are prepared to dig deep enough, you will be able to uncover the bare facts of what appears to be a significantly undervalued company. This is infinitely more satisfying than hearing boasts from an over ambitious management.

A good friend and fellow OFEX enthusiast recently regaled a fascinating story regarding a certain market constituent with whom he spoke with regards to a potential top-up of his already substantial investment. Upon speaking to the CEO of the unnamed company, he was told, Fill your boots. My friend is a sharp investor, and having heard these all too familiar words from other companies in the past, he chose to ignore the loose-mouthed management and instead dumped his entire holding. Since then, the company in question has gone on to demonstrate that it makes many promises, but delivers on very few. This company is in stark contrast to Spectrum, which is one of the most cautious companies you will be able to find on the market. Cautious with what it says and cautious with what it does, but not cautious to the extent of preventing growth.

Spectrums prudent approach may well be frustrating for investors that have held the stock over the past three years. Not least because they will have seen their shares fall from 72.5p to the current price of just 22p, but especially so when you consider the amazing progress that has been made whilst their traditional order book has slowed. A transition has occurred, which if successful, will catapult this little company into several new lucrative markets and yield its shareholders quite substantial returns in the relatively near term. I should caveat at this point that whilst I do believe Spectrum will rise significantly over the course of the coming weeks and months, the best value will, in my opinion, be realised for those patient enough to hold a little longer.

There are several very good reasons that have influenced my recent purchases. Spectrum not only looks set to be the major recovery play in the Luke Heron portfolio, but also offers a remarkable and exciting investment opportunity once the recovery is complete. When things get tough, other companies tend to keep their heads down and just concentrate on the job at hand. Spectrum beavers away, in the knowledge that things will get better. It has adopted a unique principle that has seen it invent new ways of cash generation through the tough times. Make no mistake, revenues have fallen quite dramatically, but they are beginning to pick back up again through a combination of recovery and the creation of new divisions. The full impact of its efforts will begin to show through fairly soon, as historically this company has had no problems issuing updates to the market when significant orders are placed. So what is this unique principle to which I am referring? Well Im glad you asked; heres your answer. Fully acknowledging there may be companies and to a greater extent, governments unable to afford its top of the range products, Spectrum established a division refurbishing old units and selling them on to a receptive client base. Not a huge money winner, but a solid move from a solid company. It demonstrates its managements keen ability to manipulate any situation to its advantage.

The company is not afraid to challenge itself with new opportunities to profit. To that extent it has entered into new markets, whilst maintaining its core aerospace potential for when recovery comes into effect. I am not suggesting that aerospace will remain its core focus indefinitely, although that would be a reasonable assumption since that has been its mainstay since its formation in 1989. So what about these new markets?

First off, investors should be aware that Spectrum sells its products worldwide. Following the acquisition of various US based businesses; the company has gained a worldwide foothold on its market place and is simply unrivalled in industrial laser wire systems. As such it should be no surprise for a company with this calibre of management and product that it should investigate new applications for its technology. These investigations have already begun to bear fruit, as witnessed by those who carefully read the companys interim statement in the second week of September.

Spectrum announced its arrival into two additional markets with an opening order from a major automotive manufacturer, one that if my investigations are correct, could, dare I say should, lead to further substantial orders. Meanwhile, Spectrum has made significant inroads towards establishing its first sales in the medical arena, efforts that look set to be rewarded shortly with several interested parties already knocking at its door. Its entry into the telecoms market was achieved through its acquisition of RtMc Inc. The deal brought with it RtMc's laser wire strippers, which are used in precision engineering applications, particularly for stripping either very fine wires used in high value electrical and electronic assemblies, or large gauge wires used in power and radio frequency applications for the aerospace and telecommunications industries. So what are these laser wire systems? Does anyone really care?

Perhaps not - but for those of you who have humoured me thus far by reading my humble pearls of wisdom, I will continue. Spectrums primary product line revolves around the use of ultra violet lasers for producing indelible marks on electrical wiring. You may question the importance of this. I know I did. The reality is when you have up to 180 miles of wiring in a single Boeing 747, comprising of literally tens of thousands of individual wires; it is essential to be able to identify each during both manufacture and subsequent maintenance. Using the mini bar codes printed onto each wire, it is possible to access all manufacturing information from within the customers database and present this on a PC or handheld device.

As I indicated earlier, Spectrum is the world leader. This doesnt mean it is the only company involved in wire marking instruments. Rather it is the best at what it does and wins the big orders. It will continue to do so, not only as recovery takes place, but more importantly as the new divisions make their mark on the business as a whole.

Spectrums core product not only meets all aerospace industry standards, but following its continuing extensive development programme also meets all international aerospace industry standards. It is the Alpha and Omega of its market and quite literally, the only circumstance where another company could launch an assault on the laser wire marking market would be to acquire Spectrum. Hopefully that wont happen, as the upside potential with this company for speculators like myself is quite staggering.

Christmas celebrations in my household have historically often been rather boring affairs, so much so that last year I delayed the break-up from my girlfriend to ensure I enjoyed the festivities away from home. A good move. My family often decides to focus its Yuletide conversations on stock market related discussions, with the older members of the family dominating proceedings. However this year is going to be different. My family, which comprises of some of the greatest stock market brains of the latter half of the last century (I obviously include myself in this bracket), is going to be entertained at the dinner table with a detailed analysis of Spectrum Technologies. Gone are the days of tasteless and unfunny jokes in crackers, as Christmas 2003 will witness my latest ingenious plan to realise value from some of the less known OFEX plays. Instead of the traditional paper slip of deathly levity, there will be a slightly larger piece containing my fine words of stock market wisdom. Needless to say I may be kind enough to include some of my legendary humorous words, perhaps with those lovely folks at GHW being the butt of most of my jokes. I include this fascinating insight into Heron family life as a welcome break from my Spectrum piece. Lets face it, companies that make laser wire marking systems arent very exciting, are they? However; a laser wire marking company whose efforts of slaving away during the doldrums of the last couple or so years is beginning to bear fruit; has entered new, exciting and potentially hugely profitable markets; is beginning to notice important signs of recovery and is valued at a paltry 3million, are all very exciting investment factors indeed. Hence I have established a holding.

Spectrums products are branded under the names, CAPRIS and SIENNA. The prices of its systems vary from around 70,000 for the bottom of the range product up to around 550,000 for an all-singing, all-dancing super-duper laser wire-marking machine. So, what can we expect from this company going forward?

We have seen its turnover fall from over 7million to 5.149million for the year to 31st December 2002. Interim results showed sales of just 1.636million for the six-months to June 30th 2003. Disappointing? Well, if I was an investor buying shares in this company when they were trading at a three year high of 72.5p and they released a set of numbers like the interims released in September; just prior to September 11th 2001; with the war on Iraq about to break out and SARS spreading quicker than flu in a Mancunian council estate, then the shares might look a touch expensive.

The reality is quite different. Shares sit at 22p, valuing Spectrum at 3million. Recovery is taking effect; the business has entered into new and exciting market places diversifying away from its reliance on the aerospace industry. It has now finished paying the $3.6million consideration for RtMc Inc, lifting a considerable burden and essentially enabling its ongoing cash position to improve dramatically as the company moves back into profit an event I believe will happen next year (Year commencing January 2004). In truth, I doubt it will take that long before Spectrums turnover reaches record levels again. This will partly be because of the recovery in the aerospace market, but also because the new divisions should begin to demonstrate their potential.

The interim statement was particularly revealing for a number of reasons, not least the development of products for non-aerospace clients. The final tranche of $500,000 being paid out to the vendors of RtMc Inc in cash was the last piece of a jigsaw puzzle that I had been putting together since the summer. You see had Spectrum wanted to, it could have paid this final amount in stock. The truth is it simply didnt want to. I have no problem with the management wanting to protect its own shareholdings from dilution; after all it protects my own holding from dilution also. Stating the obvious I know. However, Im sure BAE Systems, Scottish Value Management and other high profile shareholders were also delighted to see the company making this huge statement of faith in the future of their company.

In short, Spectrum is significantly undervalued. Sales are coming through again, new markets have been added and the investment arena as a whole looks like its picking back up. The management of this company is extremely cautious with its statements, yet at the same time its cautious approach will translate into profits as the recovery in its respective market comes into effect. The beauty of an investment in this company is that it is not solely reliant on a pick-up in aerospace orders. The new divisions look set to be a contributory factor in the future success of this business and one would expect, in time, that each could make as crucial a contribution to Spectrum as the 7.1million of turnover that the aerospace division contributed in 2001. When this will show I simply dont know, but the facts available suggest the shares are cheap now.

Im not going to make projections of the earnings variety. However I will stick my neck on the line to predict the move back into profitability next year. In the meantime, I think we will experience some quite dramatic share price growth in Spectrum. Whilst the stock has risen from a low of 12.25p, the market has largely ignored the beginnings of a recovery situation, not to mention the entry into additional new markets. As such I am expecting a re-rating over the course of the next few months. I will not elaborate on exactly how much we will see, as that would be foolish. Suffice to say, for the stage at which this company is at, I would happily buy myself up to 40p. A difficult task when the market is currently only offering 1,000 shares at a time. There are no sellers. Longer term I expect to see considerably more than 40p, especially as new orders are reported via the wire and further evidence of the recovery make an impact on the shares. As always I encourage others to research as they see fit. As they do so, I expect more and more will come to the same conclusion as I have. Spectrum spells a special situation.

NB. Shares in Spectrum have become notoriously difficult to buy. Market makers JP Jenkins would be happy to bid for stock Im sure, but in the meantime you may find it near impossible to acquire any amounts greater than 1,000 shares without pushing the price up 1p each time. You may question why it would be worth it, but sometimes you just have to bite the bullet and face the consequences of an illiquid market. I expect Spectrum to move up to 30p before the close of trade for 2003, it is possible at that point a couple of sellers could appear. However, that is pure speculation as with only around 110 shareholders, liquidity is not Spectrums strongpoint.

Luke Heron
lheron@totalise.co.uk

Evidence would be welcome.

As the thread is about spectrum a fundamental negative debate (from your point of view to prove your point) would also be welcome if you are up to it?

So is Third Eye telling us he made 105 times the gain from KMS? Or 355% from britannia (as you bought stacks more at 36p best include in your average price) etc!!!

Or is hew misleading readers?

LOL!

And i thought this thread was about Spectrum Third Eye which was over 20p when you borrowed your chum's tome.

I bought Britannia at 8p & 9p which is 355% In fact 140,000 at an average of 10.1p & yes I have bought more at 36p as the results this month will show a very impressive medium-long term outlook in my opinion.

Furthermore I am answering the accusations not diverting, I prefer to concentrate on the thread header but others prefer to attack Third Eye to divert.


Now would you like to make a fundamental case against Spectrum?

Negative cash situation. Could go broke. In the airline industry, so one major terrorist attack could finish them, given their parlous financial situation. Great management but if no-one buys the product it doesn't matter.

Very detailed & comprehensive.

Positive cash situation after turnaround in 2nd half.

Diversified into telecoms, motors & health, so NOT dependant on Airlines.

Turned around to make 80k 2nd half

Positive outlook as the year progresses.

No royalties to pay next financial year which could add circa 200,000 to profits.



:-)

AH, so you BOUGHT IT AT 12.5p yet you brought it to this boards attention and others at the price of Circa 26p. DO YOU ALWAYS LINE YOUR POCKETS FIRSTand then pass the tip on later to try and sustain upward momentum????????????????????, Ill answer that well yes you do and its the same time and time again with your tips.

AS for that list up above that you have given what on earth as it to do with Spectrum?, having said that its a very very poor result for someone who has been in the market over 20 years. Care to comment on the massive list of losers.

cheers GF.

Useful reference point for news (including New products sienna 55 & 250 for several industries):

www.spectrumtech.com

Actually down around 65% to 70% if you take into account the illiquid siuation on Ofex.

cheers GF.

AH, so you BOUGHT IT AT 12.5p yet you brought it to this boards attention and others at the price of Circa 26p. DO YOU ALWAYS LINE YOUR POCKETS FIRST and then pass the tip on later to try and sustain upward momentum????????????????????, Ill answer that well yes you do and its the same time and time again with your tips.

AS for that list up above that you have given what on earth as it to do with Spectrum?, having said that its a very very poor result for someone who has been in the market over 20 years. Care to comment on the massive list of losers.

cheers GF.

Profits 80,000 in second half & some momentum is appearing.

As there should be no tax charge, I think 130,000 is possible at the interims & further momentum resulting, in 170,000 for the second half.


This would put Spectrum as a world leader in what it does & indeed niche business on a p/e of 6.54

The following year upto 200,000 will not be payable in royalties, so could be possibly added to profits. If momentum ccontinues upto 600,000 is possible. If we guess at a 15% tax charge, then the p/e will further reduce to 3.8.

Rather a heap of guesses! (Given the spread as the initial post said the shares were 22p that made them c.22.75p to buy a small amount,) so down substantially -- about 40% - since to 13.75p.

Whatever happened to your 40p prediction! (I assume by using the post you endorsed that). Almost a 200% rise required from here. So any other guesses must be read on that basis.

Still primarily dependent on airline industry, so very susceptible. Cash fell from 535k to 135k last year. At that rate could equally go bust, even without royalty payments. Indeed at that overall burn rate, over 30k a month means they may right now be facing a crisis well into the new financial year. And historically the laser side of the business has been skewed to the second half, as Peter Dickinson CEO told me when I was a shareholder, so there is no guarantee the tiny eked out 80k profit last second half will be repeated in the first half this year.

Fuel costs are squeezing airlines and so orders in other areas and for new aircraft are down and could easily filter down through and hurt Spectrum.

Indeed Hawick fuel costs are hurting airlines very badly you only have to look at what happened to Easyjet yesterday and the warning they gave out. The extra costs to them are PARTLY being offset by budgetary constraint which I think will hurt the likes of Spectrum very badly.

Like you after having a very long and concise look at the balance sheet last night I can see this one going bust, I just dont feel the other parts to the business can fill the void. Others may have come to the same conclusion and this maybe the reason for the 50% plus drop in the price.

cheers GF.

I have never made a 40p prediction.

Provide evidence (a link will do)...... otherwise please don't lie or assume Hawick


We can all say this is going bust goldfinger, but to have any substance, an intelligent poster would provide a reasoned & constructive case.

:-)

Ian, my earlier post today stuck strictly to the issues as requested, but as i have been personally attacked again (in spite of your earlier warning) and accused of lying, i hope you permit me this one post in my defence:

"...Longer term I expect to see considerably more than 40p..." a quote from the original post in this thread,

which by adding your name to the post at the top Third Eye you clearly endorsed.

Or you palpably I believe - and am certain others will understand - had a very clear duty to say otherwise and distance yourself from it, which at no time have you attempted to do.

(And after all he put it better than you could ever have done, you said so yourself). No lies from me.

Do you still stand by it?

Currently 13.75p, just under 200% rise needed from here.

What is your timeframe for 40p+, please, if indeed you stick by it?

Thanks ;)

The article is from Luke Heron, (as I made very clear at the top of my post), not me, the article has his opinions not mine, do you understand?

If I write I expect 40p then & only then may you quote it. (as the truth)


Now anything constructive & reasoned to say or are you going twist something else & waste your time?

Guys,

We had a relatively quiet day yesterday with some good discussion on this and other threads - can we have more of the same today please?

Ian

Certainly Ian. As Third Eye appears to wish to distance himself from the "well in excess of 40p" section of the article can i ask which other bits Third Eye agrees with and which bits he doesn't in the article he quotes.

You see Third Eye, they are a shrewd bunch on here (as Ian's wise old bird contribution above shows ;) )and if they were to think you were posting articles on moneyam chunks of which you didn't agree with, without explaining yourself, then they might have a major credibility problem with anything else you post on this site, and we wouldn't want that now, would we...........

So what are your price targets for Spectrum, over what timespan, and which other bits of the article don't you agree with??

Moneyam readers await your full and non-evasive clarification. Thanks. ;)

PS Good luck with the exams which i am told you are taking, young Luke!

I don't have price targets hawick, you seem to like them (55p for JCR I think you said by Xmas 2003) you see that's why I mostly avoid using them or a timescale.

I posted the article to create interest both positive & negative, but hoped for more constructive & reasoned debate rather than you trying to suggest words I simply haven't written such as 40p price targets.

Now, anything worthwhile, constructive or reasoned to add or is it your goal that the thread degenerates into one about words I simply have not written?

You have ducked my questions about the article YOU wanted to discuss.

(Litcomp 10p within weeks was one your forecasts last year, now c.3.25p; just 200% to go, so, no need to be shy about price targets).

Which bits related to Spectrum in the article do you agree/disagree with, please?

Otherwise, Moneyam readers will draw their own conclusions.

If you want to be less irresponsible from now on, then you must come clean.

You simply cannot go posting other people's articles without saying if there are chunks (as apparently the 40p+ price target) you disagree with.

You owe it to this bb's readers to explain yourself.

Wishing to stick to and debate the share like Ian says(board administrator) I have to ask this, why on earth thirdeye post an article from a third party when you dont agree or back the authors share price target?.

It something I think many will also be asking.

cheers GF.