SECTORGUARD (SGD)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

SECTORGUARD (SGD): Going nowhere - July 2007

RHPS Recommendation - SELL

SectorGuard has acquired the assets of Euro Security Systems, a Hertfordshire business that installs and maintains electronic security systems. However, rival Reliance Security has described the market as "competitive" and SectorGuard's shares are going nowhere.

SECTORGUARD (SGD): Acquires Protector - Mar 2007

RHPS Recommendation - BUY

SectorGuard has acquired Protector, a Salford-based specialist CCTV installation and maintenance business for £750,000. This will be integrated into SectorGuard's Fire & Security Systems division, and will also give it an entry into the North West region. SectorGuard is a sound business on a low rating, but acquisitions can accelerate its growth.

SECTORGUARD (SGD): Solid growth - Jan 2007

RHPS Recommendation - BUY

For the year to 30 September, Sectorguard made a pre-tax profit of £930,000 on turnover of £17.8m. Last year Sectorguard moved its head office, integrated three trading companies into one operation and also made its personnel licensed to work under the security industry's new Approved Contractor Scheme. Having raised £3m last year Sectorguard is now able to make acquisitions, but should anyway show solid growth from its manned guarding, keyholding, asset protection and alarms business. Broker Seymour Pierce is predicting earnings per share of 0.38p this year and an increase in last year's dividend payment of 0.11p. The shares are on a low rating, especially in relation to comparable companies such as Group4, Securicor and Reliance.

SECTORGUARD (SGD): Buoyant trading - Oct 2006

RHPS Recommendation - BUY

Sharecall: (0906 812 1210) 3171
Trading since March has been "buoyant", and earnings for the year to the end of September 2006 will be at least 0.35p. Sectorguard can add new clients to its security monitoring service without commensurate increases in cost, and 2006/7 should be another good year.

SECTORGUARD (SGD): Excellent Interim Results - Jul 2006

RHPS Recommendation - BUY

Sharecall: (0906 812 1210): 3171
Sectorguard has announced excellent interim results, with a 16% increase in turnover and a 23% improvement in profit before tax. The gross margin rose from 17% to 22% thanks to a successful integration of the electronic security business, and net assets rose by 57% to £8.4m, which compares to Sectorguard's market value of £13.1m.

Sectorguard is growing strongly in a highly fragmented industry which has been shaken by the new requirement for security guards to be licensed. This should give an advantage to those companies like Sectorguard, which have Approved Contractor status, although it says this will be "further enhanced when the Security Industry Authority takes steps to prevent the deployment of unlicensed security officers".

This fast-growing security firm could double your money - Apr 2006

RHPS Recommendation - BUY

Companies that supply security guards have been getting a lot of anxious calls from their customers this week. "Are your guards licensed?" they ask. Because if the answer is "no", the security company will most likely find its insurance policy invalidated. Just imagine - one of the guards falls asleep and fails to notice that the building he's supposed to be minding is burning to the ground. Unless he's licensed, his customer won't be able to make a claim for negligence against the security firm's insurer!

What the new laws mean for investors

The aim here, of course, is to sort out the good from the bad. The Private Security Industry Act introduced this new licensing system on March 20th. It is now illegal for firms to deploy security guards unless they are individually licensed. This means they must have been trained, examined and then had their application approved after the necessary police and other checks.

These new laws are causing a fair amount of chaos, and they threaten the very existence of small security firms that have not met the licensing requirements. But the Act also presents an opportunity to those firms that have got their act together. One that stands to benefit more than most is SectorGuard.

SectorGuard had all its guards licensed by December 31st, the date originally proposed for the introduction of the new rules. It was one of the first companies to be granted "Approved Contractor" status by the Security Industry Authority (SIA). "These companies," says the SIA, "have distinguished themselves as being amongst the best providers of private security services in England and Wales." Approved Contractor status has been introduced to allow certain employers to deploy guards even though they may not be individually licensed. But since only 58 of the industry's 2,000 companies have this status, it's created a big problem.

51,000 illegal workers left over

120,000 guards are working around the country. Some 45,000 of them have completed the required training and have their licence. Another 24,000 guards can be deployed under the Approved Contractor scheme. But that still leaves 51,000 guards working illegally. Although the SIA promises to speed up the licensing process, this has created a wide-open opportunity for penny share investors. To add to the urgency, the Association of British Insurers has alerted its members to the importance of SIA licensing. Hence all those phonecalls this week.

The new licences have been introduced to raise standards in a lowly paid and competitive industry. Business will now start to flow towards those companies that have met the industry's standards, and there could be some uplift in wage rates, too. Since this is a "cost-plus" business - in other words, employers pay the guards and then charge their customers something on top - both these trends should boost the profits of the industry's better companies. And SectorGuard already ranks 22nd in the industry in terms of turnover, and 8th in terms of profit.

It was set up seven years ago by David Marks, a former management consultant and the finance man at Millwall Football Club. He raised the cash to build the club's new stand. As he told me last week, "If you can raise money for Millwall, you can raise money for anything."

Paperless, spartan and efficient

One day in 1999, David was writing a business plan for a cleaning company that wanted to get into the guarding business. He was challenged by a friend. "You can advise others - but you can't run a business yourself." Suitably nettled by this, David picked up the business plan and decided to pursue it himself. That was seven years ago, and David has now built a £13m company, of which he personally owns about 12%. His strategy is to buy small guarding businesses with a good reputation for service. He avoids higher risk areas such as wheel clamping, cash in transit and - since 9/11 - airport security. David has added a security alarm business and also electronic tagging of new clothes in High Street stores. This gives SectorGuard the ability to offer comprehensive protection.

The business has just moved to a new office in Waltham Cross. When David showed me around these spartan premises, overlooking a dual carriageway, we went into the control room. It automatically registers incoming phonecalls from his guards as they report for duty, and spots any discrepancies. All managers are equipped with mobile phones, home PCs and Blackberries, so that they never lose touch with the business. Gesturing towards the neat desks David explained that this was a paper-less office. "Paper-less, but not fruit-less." He pointed to a big plate of apples and laughed, "We believe in healthy staff."

A takeover bid could double this share price

So this is a thoroughly efficient and focussed company. It has 75% of its business within a 25-mile radius of the M25. It targets corporate, local authority and higher education customers. As a result, it has high profit margins, and an excellent reputation within the industry. Last year turnover rose by 10% before the impact of acquisitions. The pre-tax profit fell from £1.09m to £1.04m, mainly because of the cost of complying with the new licensing requirements. This drain will be reversed this year, of course. So the shares now trade on a Price/Earnings ratio of around 11 times. They yield 2.6% on the basis of this year's forecast for a 0.11p dividend.

In other words, this is an attractive rating for a small growing company. And it's all the more enticing given that a competitor, MITIE, recently bought Rentokil's guarding business for 23 times earnings. SectorGuard has already been approached by potential buyers, but David is in no mood to sell. "If I was ready to sell out," he told me, "I could pick up the phone today. But I have not put in this much effort to sell out at 4p.This business has good cash flow, and a solid profit. Like Millwall's football stand," he concluded, "it is built on solid foundations."

RHPS Verdict: I reckon that these shares are worth 6p on their own merits, and would sell for 7p-8p or more in the event of a takeover. SectorGuard has demonstrated its ability to grow its share of this competitive market. It can only benefit from the new regulations. Don't pay more than 5p.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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