Investors should swoop now for shares in IndigoVision (IND:AIM). The stock is unlikely to stay this cheap for long and there is potentially 85% upside to be had. The Edinburgh-based company develops video security solutions, or hi-tech CCTV systems, for use in city centres, airports and casinos all over the world.

This is a booming market as businesses and governments around the globe become increasingly security conscious, even paranoid. With offices in 15 hub cities across the globe, IndigoVision is able to tap into CCTV demand growth currently estimated at 20% a year.

A trading statement at the firm’s Annual General Meeting earlier this month (8 Nov) stated revenues and order intake in the first quarter were up 6% and more than 10% respectively year-on-year. That comes against a very strong start in 2011, and while gross margins are a touch lower, they should recover in the latter half of the year, a point house broker N+1 Singer makes clear by leaving forecasts unchanged.

Yet the market took this all very badly and the shares have collapsed by a third since. A chunk of this fall is explained by a 70p-per-share cash return going ex-dividend, but someone, somewhere thinks those numbers are bad ones, and we beg to differ.

Boardroom shuffle

The £25 million cap has previously been dogged by an internal power struggle, as founder and sacked chief executive Oliver Vellacott failed with new fewer than three management buyouts deals last year. Vellacott’s sale of his 22% stake in October finally draws a line under that, although the subsequent indigestion may also help explain Indigo Vision’s slide.

Whatever the reason, the fall creates an opportunity to pick up stock at an attractive valuation. The shares trade on just ten times earnings for the year that ends in July 2013, based on earnings per share (EPS) estimates from broker N+1 Singer of 32.7p. A 9% advance in EPS to 35.6p for July 2014 takes the forward price/earnings ratio (PE) down to 9.2 and that profit forecast looks conservative to us. Around 40p of EPS looks quite possible next year, and perhaps 45p in 2015. A forward dividend yield of 3.7% provides support, too.

As the market wakes up to IndigoVision’s growth prospects, we expect the big discount to the software sector’s 15.1 rating to narrow. A PE of just 13 could see the shares hitting 520p inside nine months for a near 60% profit. Beyond that, expect the shares to get close to 600p on a 12 to 18 month view, the sort of level last seen in early 2010, for gains of 80% to 85%.