A health check on the chosen few

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The Independent Online
During the last few weeks, there have been a number of announcements concerning the shares I have recommended in this column.

My first recommendation, Amersham International at 595p, has produced superb interim results with earnings per share up a staggering 61 per cent. Much of this was due to currency gains, but Glaxo, Wellcome and SmithKline have had a similar benefit and their profits are not advancing in such a spectacular way.

Hoare Govett forecasts earnings per share of 45p for the year ending March 1994 and about 55p for the following year. At 943p the shares are therefore on a prospective multiple of 17. Still very attractive indeed for a company that should continue to grow at about 20 per cent per annum for the next few years. Longer term, I would not be surprised to see Amersham become a candidate for the FT-SE 100 index and merge with a company like Zeneca.

My recommendation, only two weeks ago, of Flextech at 153p has justified my confidence that its future news flow would remain very positive. The company has since announced that it will buy for about pounds 100m the European programming interests of the giant American company TCI, which as a result will end up with control of Flextech. Since announcing the proposed deal, Flextech has also increased its shareholding in its cable company.

Flextech shares have risen 67 per cent to 259p while shareholders wait for the exact terms of the TCI deal expected in December.

In mid-April I recommended Ingham at 109p. This shell operation is headed by Nicholas McMahon Turner, who has taken the business so far from textiles and property into classic car parts. Interim results announced last week for the six months ended 30 September showed pre-tax profits of pounds 1,214,000 against pounds 135,000 for the comparable period last year (which had no contribution from car parts). After the interim, Peel Hunt has revised its pounds 3m forecast for the year down to pounds 2.75m, which at 149p puts the shares on a p/e ratio of only 11.5. This is very attractive for a well managed shell in its infancy.

I am a little worried about Shoprite, recommended in June at 140p and now 157p. The company concentrates its food retailing supermarkets in Scotland and is at the lower end of the scale of discounters. As a result, it may not suffer too much during the food price war that has recently broken out. However, the shares could be affected by the adverse sentiment caused by cut-throat competition. I therefore think that Shoprite is probably a sell at 157p, although I could easily be wrong about this. I will be keeping an eye on Shoprite for the future as a potential investment for when the food war cools down a little.

The Hong Kong shares I recommended in June for a China pot (a maximum of 15 per cent of your portfolio with 3 per cent in each of five shares) have done reasonably well. Innovative International has risen from HKdollars 2.90 to dollars 3.60, while S Megga has risen from dollars 2.25 to dollars 2.90.

For UK investors, there is also a bonus of over 4 per cent caused by the appreciation of the Hong Kong dollar against sterling.

Innovative, in particular, still looks attractive with earnings growth forecast at 57 per cent for the year ending March 1994. This will put the shares on a highly attractive multiple of only 10. The broker South China Securities recommended Innovative as a 'strong buy' in October when the shares were HKdollars 3.025.

It may surprise you that these two shares have not risen more with the strength of the Hong Kong market, but most of the action has been confined to the leaders. I hope that, as in the past, it will soon begin to ripple through to the second-liners.

Motor World, recommended in April at 255p, announced good interim profits well up to forecast. Following the recent acquisition of eight more shops, the final results might be a little better and the shares seem to be reflecting this, having risen in anticipation to 323p.

At this price they are on a prospective 1994 p/e ratio of about 16. I like this solid business, which can keep acquiring and cloning new branches for many years to come.

In June, I recommended the shares of British Data Management, which were standing at 223p. Today they are 241p and the consensus EPS forecast for the year ending June 1994 is 15.2p, putting the shares on a prospective p/e ratio of 16. This year the company has to absorb a higher tax charge (as it has run out of tax losses), but the pre-tax profits are growing at about 20 per cent per annum.

The icing on the cake could come if the company manages to land a government contract from the recent round of contracting out. I am very hopeful that it will.

Since my September recommendation, Electron House has risen from 118p to 130p. This is a very well managed electrical component distribution company that has been the subject of recent profit upgrades. The prospective p/e ratio for the year ending May 1994 is 18 and the forecast growth rate for that year is a massive 44 per cent followed by an estimated 34 per cent in 1995. For such a fast-growing company the shares are very cheap indeed on a PEG basis (the factor obtained by dividing the p/e ratio by the growth rate).

As you know, I recommended cutting losses on Sage and Micro Focus after 25 per cent falls and also after a 10 per cent loss on Tepnel Diagnostics when the news changed very much for the worse. These losses add up to 60 per cent, which will be reduced a little by the profit on Shoprite. The gain on Flextech of 67 per cent more than covers these losses, leaving Amersham (up 56 per cent), Ingham (up 40 per cent), Motor World (up 27 per cent) and the others developing well with clear profits.

As I have explained, the way I manage my own portfolio is to run profits and cut losses, with the result that losses are always relatively small and profits can be very substantial indeed. I believe that the shares I have recommended now include several companies that, all being well, will pass the 100 per cent gain level during the next 12 months and that, over the years, they should register very substantial gains for their shareholders.

Next week, I will review the high-income portfolio of 10 shares that I recommended in May. I will also see if I can construct another larger portfolio of shares with high dividend yields that also satisfy other highly selective criteria of mine.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after a mention in this column.

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