Smaller companies spotlight

EACH week, former Fleet Street City Editor Patrick Lay keeps This Is Money readers up to date with a neglected, but exciting sector of the stock market - smaller companies.

Cool Customer

NOW here's something unusual: An IT company that is making profits AND paying dividends. Customer Systems will be joining Ofex in the early days of October with a market cap of just under £16m, meaning that on day one it will be the twelfth largest company on Ofex. It is also the largest Ofex launch so far this year.

All of which suits founder and managing director, Steve Austen, very well: 'I'd much rather be a big fish in a small pond than be swimming around where nobody would notice us.'

Steve founded the company in 1998 having spent nearly 20 years as an IT consultant and technical salesman. He recognised a need for expert consultants who could provide back-up for software systems, and he set about recruiting in that area.

'I was astounded at the time that so many IT and management consultancies were generalists, so I developed a strategy of specialising in a small number of product areas so that we could claim 'expert' status.

'The area we concentrated on was in customer relationship management systems and the product we chose to specialise in was that developed by Siebel Systems Inc, the giant US company. The success is such that, although we are only 47 people, Siebel‘s customers in 18 countries and three continents have used our services, and the current client list includes blue chip names such as Nomura, Orange and Dyson.

'A US subsidiary was opened in New Jersey in February this year and it already contributes 15% of the company‘s overall turnover, and we are now looking at opening other offices in Chicago and North Carolina.'

The Ofex launch is by way of introduction, and no new shares are being issued. 'We do not need to raise any capital, we have cash flow every year. The quote is to provide a trading platform for our employees who are the shareholders,' says Steve, who holds 90% of the shares himself and is reluctant to sell any, although the Ofex authorities have asked him to make 1,120,000 shares (10%) available if demand is there.

And there could be demand. Customer Systems saw revenue grow 55% to £5.1m in the year which ended January 31 and pre-tax profits were up 42% at just over £2m. It also paid a dividend of 9p a share, up from 5.4p a share in the previous year.

'I believe in running a company profitably and sharing those profits with shareholders,' says Steve, whose also differs from other IT folk by wearing a suit and asking his team to dress conservatively.

He claims it is a philosophy that he will continue to follow even if he has to dilute his 90% stake which rewarded him with just over £1m in dividends last year - a reasonable addition to his pay and pension package worth £91,500.

Still only 43, Steve is unmarried: 'I‘m still looking for the perfect woman,' he tells me. My advice to any lady who might be interested is to buy a few shares and turn up at the yearly meeting. Starting life at 140p the shares will be on a historical yield of 6.43%, which is considerably better than the cash would earn in a building society or bank, and it might be the perfect platform for an introduction.

Displaying promise

While on the subject of income (see above) I return to C A Coutts Holdings, the company which designs and makes display units to help the sale of videos, cosmetics and mobile phones.

I extolled the virtues of this company early last month for both the yield prospects and potential for recovery. Since then the yield has grown for two reasons. One is that the price of the shares has fallen from 60p to 54p, the other is that the interim dividend has been raised from 1.15p to 1.25p, meaning they are now returning 8%.

Chairman Robert Essex says he looks to increase the dividend by between 5% and 10% a year and he is confident that the full-year payout will be raised in line. It's virtually in the bag following the sale last month of the group's stationery business in Essex which will generate an exceptional profit of £1.5m in the second half.

The first half is always the worst for Coutts, with the big spending linked to Christmas. In the first half of this year the company took out its Dutch partner and regained full control of an ailing operation in that country.

'We've stemmed the flow that was losing us £40,000-£50,000 a month there and are already back at break even, and we‘ll do even better in the second half,' said Mr Essex.

A sign of the positive attitude within the company is that Coutts has recently appointed a new PR agency to spread its message. It has also signed Williams de Broe as its new broker and nominated adviser and is ready to get out and meet with potential investors.

The message is clear. Disney is the biggest client, spending around £4m a year with Coutts and having just launched Monster Inc videos and DVDs, the concentration is on to bring Beauty and the Beast to a store near you for Christmas.

Also on the cards is a major spend by Hutchinson who are launching their 3G phone licences in November, and Coutts has won the contract to design and make the display units. Fox is another in the entertainment range and clients in cosmetics include L‘Oreal and Estee Lauder. Expansion is planned in both Germany and France. Don't say you haven't been told.

Rich seam?

SOMETIMES company bosses lose a lot of sleep over who is buying or selling their shares. No such problems at Cambrian Mining. Director Jo Malins tells me that since the shares were launched on Ofex on 8 August not one has changed hands.

This despite the fact that the mining finance house sold an investment in South African Mineral Resources Corporation to Golden Valley Mines for a £200,000 profit.

It is now in the process of raising its stake in Western Canadian Coal Corp from 17.5% to 23%, in AGD Mining from 9.8% to 15.5% and, significantly, in Deepgreen Minerals Corporation from 5.51% to 25%.

I say 'significantly' because Deepgreen is a similar company to Cambrian and already holds 25% of Western Canadian and around 30% of AGD.

It doesn't take much imagination to see that a merger of Deepgreen into Cambrian would make the Ofex company a major stakeholder in both Western Canadian and AGD, one of which is a major coal producer and the other having gold and antimony deposits. It would turn Cambrian from a mining finance house into a producer.

Mr Malins was unable to shed any light on this and chief executive, John Byrne, is out of the country at present, probably in Canada. Watch this space.

Some you might have missed

AIM-LISTED MacLellan Group, which provides a range of services to industry and Government, from cleaning the floors at Bluewater Shopping mall to opening envelopes in tax offices, has made a good start to the current year. Turnover rose 37% to more than £60m in the first six months and profits were 50% higher at £1.5m.House brokers Williams de Broe are predicting £4.4m for the full year and rumours are that a maiden final dividend is on the cards.

ELTON GAMES, which listed on Ofex in May, has won its first order for an Elton Derby game in Iran. It is due to be installed next month at Iran‘s first Family Entertainment Centre, Wonderland.

JASON Smart, managing director of LitComp, the company which provides medical and legal reports and rehabilitation services in personal injury claims, has raised his holding in the company to 8.7m shares, which is 22.34% of the company.

ANDREW Knight, chairman of drug discovery group Henderson Morley told shareholders there is 'a significant amount of new interest in our technology.' He hoped to bring further news soon.

SOME cheery news from Red Squared, the Manchester-based Ofex IBM hosting and managed services partner. Sales in the first nine months of this year totaled £2.8m compared with £297,000 in the same period a year ago. Losses have been reduced from more than £600,000 to £209,000, and the company appears to be heading for break even by the year-end.

ROBOTIC Technology Systems has suffered in the US in the first half of this year with group sales down 49% to £38.2m and a loss of £3.9m recorded for the period against a profit of £4m at this stage last year. However, the UK, is performing well and signs are that the US order book is rising.

DERWENT Valley, the specialist investor and refurbisher of Central London commercial property has reported a 13.9% rise to £9m in adjusted profit before tax and for the first half of this year and an 11% rise in the interim dividend to 3.05p.

AEROSPACE, precision engineering and specialist air services group, Cobham, has reported a 6.1% rise in pre-tax profits to £50.7m for the first half of this year on sales which rose 2% to £349m.

SKYEPHARMA, the drug delivery group, is on track to move into the black this year following the launch of Paxil CR, an anti-depressant.

MEDISYS has warned that it will lose revenue and make losses this year because of a delay in getting its Futura syringes to its US distribution partner which means there will be no milestone payment in the year which ends next week. Analysts predict pre-tax losses will be around £10m - £12m, virtually double the amount first thought.

Harry Potter publisher, Bloomsbury, provided some magic for a dull market this week with news of a £300,000 rise in first half pre-tax profits to £2.8m and is on track to hit forecasts of £11m for the year. Question marks remain, however, on when the next Harry Potter book will be published.

CENTRAL African Mining & Exploration made an operating loss of £186,000 on turnover of £35,000. The loss reflects the initial development phase of the group, involving setting up of its operational infrastructure in Namibia and South Africa and developing a presence in Zimbabwe and Mozambique.

Watch out for

LUKE Ahern, analyst at Seymour Pierce, has been talking to the management of support services group, Dawson Holdings, before they go into pre-results purdah. The shares yield more than 7% and he says they are a 'buy.'

RHYS Williams, retail analyst at Seymour Pierce, is keen on French Connection, sufficiently impressed with the half-time results to raise his recommendation from 'buy' to 'strong buy.'

INVESTEC Securities says it is likely to upgrade its forecasts for electronics group Alba. The broker met the company early this week and obviously liked what it heard.