Firm that caters for all tastes : SHARES : SMALLER COMAPNIES

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The Independent Online
AN OLD, and these days distinctly Politically Incorrect, piece of stock market wisdom holds that housewives make good investors because while shopping they discover the best stores and products. The assumption is that the quality goes back down the line to good management and a strongly rising share price.

This logic applies to many pubs that are boosting profits and attracting custom by offering attractive food. Less obviously to the untrained eye, to achieve the right quality the pubs need durable, high-grade equipment. They have voted with their pockets on a massive scale to buy the output of a still relatively tiny company, Lincat. A Pub Food Market Report published in January shows Lincat Fryers to be in two out of five pubs - the greatest use of any type of equipment in any sector of the trade. Most publicans - and their customers, if they asked them - would probably agree that on that basis Lincat shares are highly promising.

The numbers stack up on closer inspection, too. The company, which went public in 1988, has been dominated by the Craddock family since 1978 when the executive chairman, Martin Craddock, bought a majority stake with his father. Since 1984 sales have grown from £1.9m to £18m, and profits for the year ending 30 June 1995 (excluding the impact of a key acquisition) are expected to reach a record £l.9m against £211,000. Since flotation the shares have nearly doubled from less than 150p to 273p. But this includes a traumatic period in 1991, when profits collapsed from £l.38m to £0.71m. Mr Craddock says much of that was down to acquisitions that initially turned sour. Investors turned tail and the shares plunged to less than 70p.

But the serious headaches were relatively shortlived. The core Lincat business - designing and making high-quality light catering equipment - continued to trade strongly through the recession with margins that remain the envy of the industry. The US business, supplying pan-washing equipment for in-store bakeries, won huge orders, made excellent profits, and had sales running at more than treble the 1989 level. By 1992-93 the group was again making record profits and the share price climbed.

The performance of the other UK acquisitions has also been improving. Corsair, which makes hospital ward trolleys, vending machines and other food preparation and distribution equipment, is expected to make a good contribution to profits this year. Still disappointing is Colbrook, which supplies large canteens and motorway cafes. But Mr Craddock says he is sure Colbrook's time will come.

The biggest acquisition - and the most promising - was the purchase of Imperial Machine Company (IMC) for £6.1m in November 1994. IMC specialises in vegetable peelers and chippers and waste disposal units, which are complementary to Lincat's business. Based on figures for the nine months to end-August 1994, IMC has more than £6m sales and profits running at around £850,000 a year.

At a stroke the deal takes group turnover to around £25m, with annualised profits of, say, £2.75m making the enlarged Lincat the second biggest player in a fragmented industry. The principal vendor, Paul Bouscarle, is a highly regarded figure and has been appointed chief executive of Lincat, while Martin Craddock remains executive chairman. Mr Bouscarle showed his enthusiasm by taking most of his payment in shares, giving him a 6 per cent stake in Lincat.

Current-year profits, including a seven-month contribution from IMC, are expected to reach £2.4m with earnings per share around 19.5p, for a prospective p/e around 14. The following year analysts have pencilled in £3m to drop the p/e to less than 13. But even the cautious Mr Craddock agrees that this looks an undemanding figure, given that there will be a full-year contribution from IMC and scope for a significant turnaround from Colbrook. On top of that, trading is running strongly across the group. New products are being launched at regular intervals.

Last but not least the US potential. Lincat's main US subsidiary, Douglas Machines Corporation, launched a clone of its UK business five years ago. In that time sales have grown from $80,000 (£50,000) to more than $400,000. Lincat USA has begun manufacturing in the US, and this year sales could hit $750,000 and break through into significant profits.