Persona nets the big ones

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The Independent Online
THE single most important explanation for the strength of Wall Street is booming technology shares. Just one example, which few British investors will have heard of, is 3Com, which manufactures products that link up personal computers in networks. Since 1991, its shares have risen from $3 to $67 (pounds 43) taking its market valuation to $4.7bn.

The UK route to investing in these success stories is via the companies that distribute their products in Britain. The market has reportedly become very lively in the past six months, and we expect pleasant profit surprises from companies in the sector.

One company where the group's own stockbroker has recently upgraded its forecasts for profits this year and next is Persona, at 200p. I wrote about the company a year ago, at 193p, in a piece focusing on companies with training operations. Persona has a fast-growing subsidiary, called Faculty, which helps staff of blue-chip companies learn about new technology. The group is rapidly adding space and lecturers to cope with demand.

But its main business is distribution of networking products, mostly for US companies. Its single largest client is 3Com, with more than 50 per cent of sales coming from this and two other fast-growing US companies, Bay Networks and Cisco Systems. But it is adding new names all the time. Cisco, the global market leader in internetworking, only became a supplier in the first half of 1994 and has already become one of the top three.

Wayne Channon, 36, the chairman of Persona, describes trading as very strong and is already excited about the next wave of technological advance heralding such amazing developments as the wireless office, with radio communications replacing miles of internal cabling.

Distributors might sound like an expendable part of the system, but the US giants, fully occupied with R&D and low-cost manufacturing, need such dedicated intermediaries as Persona to bring their products quickly to market on a worldwide basis while they still have an edge. Customers are the thousands of resellers in Britain, who supply the corporate end- users.

Ingrid von Henschel, an analyst at the stockbroker Beeson Gregory, recently published a note upgrading her calendar 1995 forecast from pounds 2.6m to pounds 2.8m and for next year from pounds 3m to pounds 3.4m. On these numbers, the price-earnings ratio falls to 12.9 and 10.6, which looks decidedly undemanding.

Another company I like in this sector is Northamber, at 164p, which has been quoted since June last year and until recently, was having a torrid time. Northamber distributes a much wider range of products than Persona, and suffered in the early 1990s, when flat volumes left distributors scrambling to unload excess stocks of personal computers against a background of plunging prices. Difficult conditions led to losses in 1991, 1992 and 1993 and only a modest profit in the year to 30 April 1994.

But since then, prospects have been picking up sharply, with increased interim profits followed by a "warning" in April, just before the year- end, that 1994/95 profits were going to be significantly ahead of expectations in the market. Three factors are driving the improved trading: the group has taken an axe to costs, there has been a huge increase in volumes (overcoming the impact of still-falling prices), and the group has been spreading its range into peripheral products where price and margin pressure is less intense.

The numbers are chunky, so only a small improvement in profitability can have a dramatic impact on bottom-line profits. For example, the pounds 526,000 profit for the six months to 31 October last, against a pounds 54,000 loss a year earlier, was generated on sales of pounds 74m, implying margins so thin as to be almost invisible. But I understand gross margins have stabilised after years of decline, while volumes continue to surge ahead. This combination of higher gross profits and stable overheads creates the potential for pre-tax profits to move up dramatically.

The group is reporting on Tuesday and analysts are increasingly confident the profits figure will be pounds 3m or better, with perhaps pounds 4.5m achievable for 1995/96. On those numbers, Northamber becomes a cheap share on a p/e of 13.5 or less, falling to perhaps 9 for the current year.

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