MIDAS SHARE TIPS: War on fakes ought to preserve cash rolling in at Spectra

It was bad enough to discover that Chinese counterfeiters have been flooding the UK with fake stamps, causing distress to thousands of people and businesses. Now there are suggestions that fraudsters have been at it for years – but their crimes have only come to light since barcoded stamps became the norm.

The stamps are produced by Cartor, a 100-year-old high-security company based in Wolverhampton. Cartor may be able to trace its roots back to Victorian times but the firm is one of only two businesses in the world with the technological nous to deliver stamps with encrypted barcodes.

Now Cartor has been snapped up by Spectra Systems, an Aim-listed firm run by Nabil Lawandy, an astrophysics professor turned entrepreneur. Based in Rhode Island, USA, Spectra is a cutting-edge business in its own right and the shares, at £2.17, should go far.

The group has developed a unique process that allows central banks to detect whether banknotes are the genuine article or not. Many of us hold notes up to the light to see whether they have a watermark – and shop-owners do likewise, especially with large denominations. Spectra’s technology is far more sophisticated. 

Known as a Level III Covert feature, it uses special powder injected into the notes themselves and detectable only by dedicated sensors.

High security: Cartor is one of two businesses worldwide that produce barcoded stamps

Spectra makes both the sensors and the powders and its detection system is already used by some of the largest central banks in the world. These include household names whose currencies are used on an international basis, as well as banks concerned about state-sponsored terrorists infiltrating their economies.

Winning new customers can take years. Central banks are understandably cautious so checks and balances are extensive. But Spectra has grown consistently since floating on the stock market in 2011 and the next two to three years should see an acceleration in sales, profits and dividends. Lawandy’s biggest customer has just signed a major contract, under which Spectra will replace old sensors with new models. The project should turbo-charge results, adding millions to the bottom line.

Then there is the Cartor acquisition. Cartor’s customers include more than 150 postal firms worldwide. Today, only the UK and Germany use barcoded stamps but Cartor is expected to win many new customers over the next few years, all keen to reduce fraud. Cartor also works on passports and duty stamps on products, such as whisky, for export.

Now, as part of Spectra, the firm is looking to move into plastic banknotes.

Two companies have cornered the market for these notes – De La Rue in the UK and Canadian group, CCL. But Spectra and Cartor hope to edge their way in, by incorporating the Level III Covert feature within the plastic itself. More than 60 central banks worldwide have made the switch from paper to plastic. But the new notes are vulnerable to fraud, like their paper predecessors, and Spectra is in advanced talks with several central banks that are concerned about security.

The Cartor deal is expected to accelerate this process. Cartor specialises in high-security printing. Spectra specialises in security features. Together, they make a formidable force, especially as several central banks are keen to add a third supplier to De La Rue and CCL’s duopoly. There are further avenues for growth, selling Spectra’s smart fraud-elimination technology to Cartor’s customers, including postal services.

Spectra joined Aim in 2011 and has increased earnings by almost 15 per cent annually for close to a decade. This year should be even better.

Brokers believe sales will more than double to $45 million (£36 million), as the sensor fitting contract kicks in. Profits are forecast to rise by 22 per cent to $10 million and the dividend is expected to climb 6 per cent to 12.3 cents (9.9p) although a special payment could be on the cards either this year or next.

Further large increases in sales, profits and shareholder payouts are pencilled in for next year and 2026, too.

Midas verdict: Spectra’s technology is known as the last line of defence against those intent on defrauding countries, companies and consumers. The business has been making progress for years but the tie-up with Cartor should create a whole that is significantly bigger than the sum of its parts. With state-sponsored terrorism on the rise and the world increasingly dangerous, Spectra’s technology is likely to be in demand. At £2.17, the shares are a buy.

Traded on: Aim Ticker: SPSY Contact: spsy.com