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.

Cold-shouldered on the Terrace

NO wonder small shareholders become disillusioned with public companies. It is one thing investing in giants like Marks & Spencer, where you have to accept from the start that your votes count for little against the might of the institutions, but quite another being treated to the cold shoulder when a small company supported in its early days, decides it is now really too successful for the likes of you.

We have seen a growing number of emerging companies this year who have moved, or are moving from Ofex to AIM because that is where they claim they can get more support from institutional investors.

So, just as a company is ready for lift off, those individuals who took a chance when the risks were high, are ignored as the company arranges 'a placing' of new shares with a couple of institutional backers who would not have given them the time of day a few years earlier, so diluting the size of the original backers‘ holdings.

What has happened to the good, old-fashioned 'rights issue' that gave existing investors the first option of putting additional money into a company according to the size of their shareholding?

I appreciate that in many small companies it is the founders who take the biggest risks early on, and they may not have sufficient funds to take up all their rights; but that is no reason why others should be denied.

I raise the point because the first three companies I am writing about this week have all raised funds in the past year through placings. Two of the three are moving sharply ahead, and the third believes it soon will be.

One, Terrace Hill, the AIM-traded property group, has gone even further, it is doing its best to clear its 1,200 small shareholders – defined as those with around 500 to 1,000 shares – off its books altogether.

This is a company that raised £8.1m through a placing with institutional investors in the past year, selling shares at 29p each, and is now offering to buy back 2m shares from 'small shareholders' at 28p each, without cost.

'These are people who don‘t really know what their shares are for,' one Terrace Hill director told me this week. 'We can help them cash in and at the same time reduce the size of our share register,' he added.

Just in case any Terrace Hill shareholder is tempted, I should point out that the company provided the same opportunity for small shareholders a year ago but then offering 22p a share. Those who resisted are at least 6p a share better off this time.

And who is to say that next time it won‘t be even better? In the six months to end April pre-tax profits were £776,000 which compared with £2.22m in the whole of the previous year and an interim dividend of 0.3p a share (double the rate of the final dividend paid for the preceding period) is being paid 'reflecting the directors confidence in future growth prospects'.

Terrace has a development programme amounting to £500m and if I had been a small shareholder when times were tougher, I certainly would not think this was the time to leave. As Juliana Weiss Dalton, analyst at Seymour Pierce says: 'Terrace Hill appears relatively cheap,' and she has set a price target of 35p a share.

She, however, adds: 'We believe the proposed share repurchase will aid in removing smaller investors and improve liquidity in the shares.'

If Ms Dalton believes the shares are worth 35p, I don‘t see why small shareholders should sell for anything less.

Debt Free
And so to Debt Free Direct, the company that offers advice and solutions to those whose debts are spiralling out of control. This is another company that has boosted its balance sheet by raising £3.7m through a placing of shares with institutions – and guess what? The institutions have been happy to come aboard now that the company has shown it can deliver, producing pre-tax profits of £508,000 in the year to end April.

This is a company that takes 400 calls a day from folk with unsecured debts averaging £20,000 and a quarter of these rising to more than £36,000. It is a figure that is unlikely to fall in the current era of rising interest rates.

Over the past 18 months since I first wrote about them, shares of DFD have risen from around 25p to their current 83p, and Roger Jones at W H Ireland believes they could rise to 106p in the short term. Wouldn‘t it have been nice if some of those who backed the company at 25p had been offered the chance to subscribe for further shares at the February placing at 60p a share?

River Diamonds
The final example of the institutionalisation of our smaller companies is River Diamonds, currently signing off its pathfinder prospectus and raising around £1m for its move from Ofex to AIM at the end of this month. Chief executive Colin Orr-Ewing - son of the former Tory Minister and the man who led us into decimalisation, Ian Orr-Ewing (later Baron) - tells me the reason for the change is there are no 'real sources of funding' in the Ofex market – despite the fact that he found funding when the company was first quoted on Ofex three years ago and next week Ofex launches its multi-trading operations.

One of the results of institutional backing is that serial mining investor Bruce Rowan‘s personal stake has been reduced to around 14%. In this instance, however, I am more inclined to welcome the involvement of more professional investors.

Although River Diamonds is currently producing a few hundred gem diamonds a week, averaging 0.42 carats, and selling them at around $250 a carat, this is still a risky business, as highlighted by the story of the Cintra Larga tribe of Amazonian Indians who, in April, murdered 29 diamond miners 'riddling their victims‘ bodies with arrows, beheading several and using others for live target practice, to send a message to other miners to keep off Indian land,' according to a Daily Mail report.

The Indian‘s concerned were from the Roosevelt River Indian Reservation, only 300 miles from River Diamond‘s properties in the Mato Grosso area.

Own goal

SO Acquisitor Holdings (Bermuda) has succeeded in ousting the board of former high-flyer Baltimore and replacing it with its own nominees. New chairman is David Buchler, described in various publications this past week as a 'turnaround specialist' so that should be good news for the long-suffering shareholders of Baltimore.

Seeking to inspire enthusiasm for the change, I decided to enlarge on Mr Buchler‘s success so far, a not too difficult task you might presume from somebody with such a track record.

But it has been harder than I thought. Failing to get hold of the Acquisitor team directly I approached Ken Cronin its public relations spokesman at Gavin Anderson. The conversation went something like this:

'So what has Mr Buchler turned around?'
'Well Mr Buchler is D B Consultants and their biggest success is with Kroll (is that with a ?K‘, I asked; I believe so, was the reply) where things went from quite small to quite large, I‘m sorry I don‘t have the details.'

'What else?'
'He was appointed by the courts to investigate recoveries from the Maxwell Estate.'

'Was he successful?
'I don‘t have that detail.'

'What other successes has he had?'
'A lot of that is confidential.'

Mr Buchler is, of course, deputy chairman of Tottenham Hotspur Football Club and that, of course, is a test for anybody‘s turnaround skills, both on the field and in the share market – and I speak as a long-term Spurs fan and one-time shareholder who is nursing losses.

New issue alert

NIPSON Digital Printing Systems, the Dartford-based maker of digital printers and related systems, plans to come to AIM at the end of July. The company, whose board includes the 67-year old David Gestetner, former managing director, chairman and president of the Gestetner Holdings, had a turnover of just under £30m last year.

TRL, a specialist defence electronics group, which focuses on surveillance, monitoring and counter-measures in satellite and radio communication, is seeking to raise between £10m and £15m through a placing and seek a quote on AIM. The first £3.5m of the funding will be used to repay bank debt.

ADVENTIS, the multi-media marketing and advertising agency, who raised £3.6m through a share placing through W H Ireland has made a successful start to its life on AIM. The shares offered at 28.5p each have risen to 30.5p.

Some you may have missed

iTrain
The German operation of training group, iTrain, has signed a deal with leading European medical software company ID GmbH, for the development and marketing of on line training courses for the German healthcare system. ITrain will receive annual licence fees averaging around e1,250 per hospital and ID GmbH supplies its software to more than 950 hospitals throughout Germany.

Sinclair
Sinclair Pharma has received EU regulatory approval for T-GO, a treatment for painful throat conditions, such as pharyngitis.

Parry
Parry People Movers, the Ofex provider of ultra-light transport systems, has won the support of the Strategic Rail Authority for an experimental service of a light railcar in the West Midlands on the branch line between Stourbridge Junction and Stourbridge Town. The SRA‘s interest in the PPM system is in the context of its plan, now under study, to convert a number of branch lines of the national rail system to 'community railways'. The company is raising £250,000 through the issue of entitlement shares and convertible loan stock.

Coutts
Coutts Holdings has appointed Durlacher as its nominated adviser and broker.

SA Resources
South African Resources has offered to acquire the remaining 48% stake in its Australian exploration subsidiary Tau Mining.

Angus
Mining group, Angus & Ross, has started drilling on the Diggers Creek tenement, in north Queensland where a prospector recovered coarse nuggety alluvial gold in the 1970s.

Premier
Premier Oil has agreed with its joint partners an exploration and appraisal drilling campaign in Mauritania that will start in August.

Some to watch out for

ICM Computer
Michael Vassallo, analyst at Brewin Dolphin Securities, does not hold back on his initial coverage of ICM Computer Group, providers of IT assurances services to small and medium sized companies throughout the UK. He sets a short-term price target of 350p on the shares (currently 292p) and says: 'We believe a fair value of 650p is achievable once the true potential of the group‘s business continuity network is realised.'

Wembley
Greg Feehely at Altium Securities believes the fall in Wembley share price following the withdrawal of BLB‘s offer, could be a good buying opportunity. He says the shares, currently 541p, have a target price of 650p.

Mr Feehely is also a fan of nightclub operator, Urbium, where he is suggesting a 'fair value' of 674p against the current 600p. Urbium also gets the thumbs up from Bridgewell who expect at least 10% earnings growth in the short term.

Volex
Robert Sanders, analyst at Arbuthnot Securities, says: 'We believe there is a major upside potential in the share price of Volex, and thus remain buyers' at 123p. He is also a supporter of Polaron, at 157p, believing the shares look 'extremely attractive on fundamentals.'

Tadpole
My attention has been drawn to Tadpole, the computer software group, by an enthusiast who says: 'Some punters, not normally known to be over-enthusiastic are getting quite effulgent (it means brightly shining) about the prospects for Tadpole' over various deals in the pipeline for its Endeavors subsidiary. He adds: 'I am assured July will be Tadpole‘s month.' I pass it on for what it is worth.

First Derivatives
Luke Ahern believes there is still a 25% upside in the shares of First Derivatives at 81.5p, even though they have risen 40% in recent weeks. Preliminary results for the year to end February showing a 62.5% rise in turnover to £2.679m and an 86.5% rise in pre-tax profits to £757,000 has led to Mr Ahern to upgrade his earnings forecast for this year by 35%.