Cut out for the big time

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The Independent Online
AN EXCELLENT indication that a share is going to make dramatic progress is when a company produces spectacular interim profit figures. If it is a smaller company, the investment community often does not fully register what is going on and the shares can be set up for another leap if - as often happens - the company follows up with equally good figures for the full year.

A classic current example is The Wensum Company, a still tiny men's clothing manufacturer that last autumn reported pre-tax profits up nearly 10-fold from £56,000 to £509,000. There is a strong element of recovery in those figures from a recession-affected period. But it also reflects real growth, comfortably exceeding the previous half-year record of £369,000 achieved in the first half of 1990/91.

I recommended the shares at 65p in July last year, well before the interims were reported. Since then, they have risen to 132p, but they still look set to move higher ahead of the full-year figures due in April. After the interims, analysts moved their forecasts for the year to 31 January 1995 up from £750,000 to £1m. This is more than twice the figure they had been looking for when the year began. On those profits, earnings per share would be around 9p for a historical earnings multiple of 14.7. The chairman and chief executive, Andy Hughes, says he is comfortable with those figures, which should encourage investors. My hunch is that something nearer £l.lm could be achieved.

This would have interesting implications for the year that has just begun, for which analysts are looking for £1.15m. That figure could be significantly too low. The group is spending heavily to achieve dramatic productivity improvements, while also changing the business mix to enhance gross margins. At the same time, order books are strong, stretching well into the second half of the year. A combination of rising sales and improving margins is a potent force for lifting profits. It is not impossible that this year's profits could be nearer £l.5m than £1.15m, to drop the p/e to under 10. Those are very much my numbers, though, and investors should not count on them.

The remarkable turnaround at Wensum has been achieved because of a strong recovery at both its main trading divisions. A big breakthrough came when the corporate clothing division won the order to supply Eurotunnel with uniforms. Typically the group wins one big order every year, and it was the failure to do so that contributed to poor trading earlier in the 1990s. Since then, the division has enjoyed an across-the-board improvement and further significant orders are expected.

Mr Hughes makes much of the "integrity" of the clothing made by the group. The best way to understand what he means is to think of sofas, where the quality of craftsmanship is largely hidden. The same goes for suits which, in Savile Row terminology, are "built" rather than just manufactured. The hidden bits in the lightweight men's suits and jackets made by Wensum are built with "integrity" to survive many visits to the dry cleaners.

The problem, which has been rectified in the last 12 months, is that these suits cost too much to make. Wensum has invested heavily and reorganised its factories to transform productivity. It has also enjoyed great success in broadening its customer base, adding names such as Harrods to longer established names like Austin Reed. This has had the effect of reducing the company's dependence on one long-established customer, Marks & Spencer, from 40 to 25 per cent.

The group has exciting plans to keep the business moving forward. One key new area is bespoke made-to-measure suits, to capitalise on the group's reputation for high-quality production. Computer technology means that high- street chains are able to offer affordable bespoke suits at little more than the price of a good off-the-peg suit. The result is a gathering boom in bespoke tailoring from which Wensum is ideally placed to capitalise.

A little further down the road is a desire to move into womenswear, offering suits to the working woman that are made with the same workmanship enjoyed by the group's male customers.

Mr Hughes would ideally like to find the perfect acquisition, but concedes that it is more likely that he will just have to start from scratch to build the new business. It all makes Wensum, which was floated at 70p in 1989, look like a small business that is on its way to becoming a great deal bigger.