All roads lead to CD-Rom

SMALLER COMPANIES

NEW EQUITY bull markets, such as the ones that appear to be starting in London and Wall Street, need fresh concepts to fuel investor excitement. One that seems sure to attract great interest is multimedia. Companies supplying this sector could be on the brink of a sustained period of explosive growth.

One area where growth is already taking off is CD-Rom. This uses compact discs just like the audio ones, but played on computers to generate text, sound, illustrations and moving video pictures, which can be accessed interactively. Although it is still early days, some of the products coming on to the market are stunning. A year or two from now we can expect a multimedia Christmas, when consumers will be fighting in the shops for titles on CD-Rom.

The reason it has not happened yet is the sparseness of CD-Rom players. But that is changing fast. One reported statistic is that sales of CD- Rom players worldwide (many built into new personal computers) are outstripping those of televisions. The most advanced market is the US, where the number of players in homes has grown from 4 million to 14 million in a year. Third-party expectations are that from a low base, growth in Europe could be even faster. In the UK, for example, the number of players sold is expected to go from 500,000 last December to 3 million by the end of this year. Third-party sales projections suggest US multimedia turnover could rise from $lbn to $6bn by 1998, with European sales projected to climb from $260m to $4.2bn.

A company in a front-line position to benefit from the boom is Dorling Kindersley (325p), the global publisher of illustrated books for children and adults. Some of the potential is in the price, with the shares on a prospective price-earnings ratio approaching 30 for the year to end in June. But this could be more than justified if the group hits the multimedia jackpot. If profits continue to climb, as looks possible, the rating is likely to stay high, with the full effect of rising earnings per share feeding into a higher share price.

In the US, the group's first five multimedia products, including such subjects as David Macaulay's The Way Things Work, sold more than 130,000 copies in three months to end-December. That was in the run-up to Christmas, but sales have continued at similar levels this year.

Four new titles will be launched this spring and a further four in the autumn. Quality is improving dramatically and foreign-language versions are becoming available.

One prediction is that multimedia sales will reach 10 per cent of total turnover this year and 25 per cent in a few years. This projected growth is against the background of total overall turnover growing strongly as the DK brand becomes established in the vast US market.

Last year, thanks in part to new management and more focused marketing, Dorling Kindersley's American business took off. For the six months to 31 December, US turnover grew from £15.2m to £25.3m in total sales of £60.8m. The high rating may cause some short-term volatility, but the shares could be much higher by the end of the decade.

For investors who like their stocks cheaper, Forward Technology, at 61p, on a single figure prospective p/e, offers another route to invest in a company poised to benefit from the CD-Rom boom. One of the group's two main operating divisions manufactures discs for both the audio and CD- Rom markets. The group recently reported a dramatic first-half improvement with operating profit, before exceptional items, rising from £l.34m to £2.23m.

This partly reflected the group's success in the CD market, "particularly CD-Rom", it reported. As a result, the group is spending £3m in order to more than treble CD capacity from autumn this year. Given the developing boom in CD-Rom players, this could be the first of a series of expansionary moves.

The group's other main business is its electronics division, supplying specialised equipment for plastic bonding and precision ultrasonic cleaning. This is an international business with only 30 per cent of sales in the UK.

Recently it has won a $6.4m (£4m) order from a US company for lamp-making equipment for cars (the lamp is welded into a plastic case which is then welded into the car).

This will start to contribute in the current year and means that both divisions of the group are trading well simultaneously. The house stockbroker, UBS, is looking for pre-tax profits to reach £2.8m this year for earnings per share of 6.7p, implying a prospective p/e of 9.1, with further advances to follow. That looks cheap.