Crash-proof technology firms

Investors traditionally find the high technology area of the stock market a minefield. An area of dramatic growth and potential, it is more volatile than the overall stock market. One canny approach, however, is to focus on service companies which profit from growth and changing products without the risk that a technology may be replaced by a rival. Two companies that fit the bill and look set for growth are MSB International, at 417.5p, and Ideal Hardware, at 695p.

I wrote about them in May last year when MSB stood at 245p and Ideal at 605p. Although very different - Ideal distributes data storage products, while MSB supplies IT personnel on short-term contracts - they share an aggressive sales approach. Each has dedicated sales forces who make most, or all, of their income from commission. Both manage to grow sales aggressively without compromising quality. Ideal has won a string of awards, while MSB prides itself on never promising suitable contract personnel without being able to deliver.

James Wickes, the 35-year-old businessman behind Ideal Hardware, says that given the prospects he and his colleagues would "need to be idiots" not to take advantage of the market.

According to Dataquest, the European data storage market is expected to more than treble from $6.6bn (pounds 4bn) in 1996 to $22.9bn (pounds 13.7bn) in 2000. If Ideal can just hold its market share, it should do well. Between 1992 and 1996 turnover grew at a compound annual rate of 46 per cent, from pounds 30.4m to pounds 138m and by 24 per cent in the last half-year from pounds 60.9m to pounds 75.6m.

Ideal Hardware is a wholesaler supplying re-sellers of computer equipment. Demand is booming because of the ever-increasing requirements for storing data. Part of Ideal's market edge comes from keeping its customers up to date with technology. In addition to comprehensive catalogues and CD-Roms, it broadcasts a daily television programme covering new product developments to many of the 8,500 re-sellers it supplies. The Internet is becoming a highly cost-effective way of informing customers.

Growth will benefit from a new 70,000 square foot warehouse at Chessington with the capacity to expand. Cash generation is strong, enabling the warehouse to be financed largely out of working capital. The year end is changing from 30 April to 31 July with a second set of interims due for the six months to 2 May 1997. Recent forecasts suggested earnings per share rising at around a 20 per cent rate to 29.5p for 1996-97 followed by 36.4p. My hunch is earnings for the later period could be nearer 40p, implying a price earnings (PE) multiple somewhere around 17.

MSB International, which is due to report its first set of full year figures as a quoted company in mid-April, is arguably growing even faster. Demand for qualified personnel is buoyant as the "millennium problem" - the inability of many computers to distinguish between the year 2000 and the year 1900 - joins with other requirements such as Europe moving to a single currency and firms introducing networked computer systems. It adds up to soaring demand and charge-out rates for IT contractors. MSB rates have risen by 11 per cent and the number of con- tractors has climbed to over 1,300.

Growth seems likely to continue with qualified IT personnel becoming scarce. At the halfway stage last October, MSB's sales climbed 91 per cent to pounds 30m with pre-tax profits up 71 per cent to pounds 2.35m. Margins slipped from 9 to 8 per cent partly because of fewer permanent placements and the distractions of flotation. A move to larger premises is helping growth, and margins are expected to rebound in 1997. Full-year profits should reach pounds 5.5m for the year to 31 January 1997, dropping the PE to 22.5 times, with a further sharp fall likely in 1997-98 as turnover heads for pounds l00m, taking profits to a likely pounds 8m-pounds 9m.

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