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.

Good times at Telecom

Barry Roberts, chairman of IDN Telecom, was in fine form when we met for lunch early this week; the company had just reported that a £2.18m trading loss in 2002 had been turned into a £250,000 pre-tax profit in 2003, and that must be some relief for somebody who is sitting on 75 million shares.

IDN Telecom earns its living by offering clients independent advice on the best providers of telecommunication services for both landline and mobile, as well as data communication services.

The major breakthrough for the company, which now has been suffering from development losses and restructuring in past years, has been to move from advising small and medium-sized companies, to getting involved with some of the giants of industry, local government and health care groups that spend £100,000 to £400,000 a year on their phone bills.

IDN shows companies how much they are spending on such costs, and how much can be saved by choosing an alternative carrier. Once the client is convinced, IDN negotiates terms or commission with the suppliers, who are grateful for the introduction of such valuable business, and charges the clients a fee for the cost saving advice.

Having recommended the best solution, IDN arranges appropriate contracts, service provision and migration across to the new provider – importantly it also reviews the operations regularly and advises on further changes when necessary.

In a market estimated to be worth some £4bn a year, and everybody looking to cut costs, IDN is building a reputation. SQC Research has been looking at the company and says: 'The management is committed to cash flow, profitability and revenue growth – all of which are showing continuous improvement. Big profits are now ahead, against which there are more than £4m of tax losses to use.'

The research group is setting a target price of 6p a share by the end of 2005, virtually double the current market price. That would be good news for Mr Roberts.

Sound developments

THIS time last week I reported on an up-market trading statement from Armour Group, the in-car entertainment specialists, and on rumours that a deal had been signed with BMW.

No sooner the word than the deed – this week Armour has confirmed a $850,000 order to supply the in-car multimedia system for a new BMW model. The first deliveries are scheduled for this year.

No wonder Alex Jarvis at KBC Peel Hunt is increasing his pre-tax profit forecasts for both 2004 and 2005, now predicting £30m for the current year and £35m for next.

He says 'we expect continued good newsflow over the next 12 months.'

All credit to Ofex

IT was only in the third quarter of 2003 that the stock market started to become more optimistic, by which time Ofex was setting out its stall for the current year.

It is a credit to chief executive Jonathan Jenkins and his team that in a year when minds were occupied with the exchange‘s launch on AIM, recruiting additional market makers and building a Business Development team and an Advisory Group, that it still showed a 21% jump in turnover to £1.1m and cut operating losses by £200,000 to £500,000.

With these functions now behind it, the small companies market now expanding fast, and Government proposals to remove restrictions that prevent many pension schemes from investing in Ofex and AIM traded companies, I stick by my New Year belief that this is a share to watch this year.

I find support from Anne McMahon, analyst at Seymour Pierce, who says a fair value for the shares is between 42.4p to 56.5p, and they are a 'buy' at 28.5p.

Some you may have missed

Pursuit Dynamics, which uses steam as a driving force, has sold its first unit to Welcome Food Ingredients for use in the manufacture of more than 20 products, including sauces, soups and stocks. A pilot operation has reduced manufacturing times up to 95% and a cut in cleaning times between batches of as much as 80%.

SOCO: Oil and gas exploration group SOCO, reports a £300,000 rise in net profits to £5.8m, despite a £500,000 drop in turnover to £25.5m. At the year-end the group had £32.9m in cash and no debt.

Cardpoint, which owns more than 2,000 cash machins and some 3,500 mobile phone top-up terminals in the UK, has signed an exclusive five-year contract with RoadChef, the motorway service area operators, with a minimum estimated turnover of £10m over the period.

Ennstone: Aggregate group Ennstone saw turnover rise 14% to £87.8m last year while profits were 7.7% higher at £9.6m, another record.

Concurrent: Michael Collins, chairman of Concurrent Technologies, the computer group, says: 'Our target markets are showing strong signs of recovery, driven in particular by the increase in spending in the US on defence and homeland security projects.' A component supply problem last year, which caused pre-tax profits to be halved to £280,000, has been resolved.

Offshore Telecom: Daniel Stewart has raised £2,250,000 for Offshore Telecom through a placing of shares at 2.25p each.

Shire Pharmaceuticals has appointed David Kappler as non-executive director and chairman elect of the company‘s audit committee. Mr Kappler retires as chief financial officer of Cadbury Schweppes next month.

Care UK, the health and social care provider, has signed a contract with the Department of Health and 28 primary care trusts for the Trent & South Yorkshire region Independent Sector Treatment Sector.

Litho: Propping up the company pension scheme meant printing group Litho Supplies faced an exceptional charge of £2.46m last year, a figure that reduced pre-tax profits to £1.66m from the £1.80m in the previous year. Chief executive Mike Hammond says: 'We are well placed to take advantage of any recovery in the printing and advertising sectors.'

TripleArc, a provider of technology to the printing industry, has signed a 10-year sales and distribution agreement with Four51 Inc, a US-based e-solutions provider for the printing market.

Petra: AIM-quoted Petra Diamonds has raised £7.5m through a placing of shares with institutional and other investors through Williams de Broe, most of which will be used to develop its Alto Cuilo diamond project in Angola.

Data: KBC Peel Hunt has been appointed nominated adviser and broker to ID Data. Meanwhile, the company is buying Mids & Horsey, a card producer and personalisation bureau accredited by Visa and MasterCard, for £3.3m.

Centurion Electronics has raised £1.21m through a placing of shares arranged by Charles Stanley. The funds will be used for product development and continued expansion in Europe.

Michael Baker Corporation, in which Acquisitor Holdings (Bermuda) has a 4.95% interest, has won a five-year contract with a monetary ceiling of $2.1bn from the US Air Force Center for Environmental Excellence.

Some to watch out for

NMT: Mark Watson-Mitchell, writing on his WatsHot website, comes on very strongly for NMT Group, which used to make needles (syringes actually) for safe drug delivery, but has closed its Scottish factory and is now licensing others to produce its products. This is a company that has cut staff from 156 to 10, reducing annual outgoings to £1.5m, and has £12.8m cash in the bank.

Five years ago the shares were trading at 127p each but are now under 1p and Mr Watson-Mitchell says they are 'an excellent punting stock'.

Tadpole: Unconfirmed reports reach me that Tadpole group could be coming out with some 'very important news this week.' Should stir up the pond a bit.

Amlin: Dilip Shah, analyst at Arbuthnot Securities says the 2003 results from Amlin were ahead of expectations, and the trading outlook bodes well for pipeline earnings into 2005 and 2006, and Amlin‘s dividend policy should make the shares appeal to income investors. He says the shares are a 'buy' at 163p.

Morley: Jon Levison, analyst at Hoodless Brennan, sets out a case for a 'speculative buy' of shares in Henderson Morley, the drug discovery company, at 1.88p. He says: 'The results of the eye treatment, which is currently in Phase II, may be known within the next two to six months and could produce a valuable therapy. This possibility does not seem adequately reflected in the market cap.'

WSP: Support services group, WSP, gets a 'buy' recommendation at 200p from Michael Morris at Arbuthnot Latham. He says the shares look very cheap because of the operational gearing of its earnings.