Rainford is upwardly mobile

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The Independent Online
THE UK equity market is shortly to take delivery of its third specialist supplier of equipment to the telecommunications market. The newcomer is Rainford Group, which makes cabinets for outdoor base stations used to build cellular telephone networks. The other two, both recently floated, are Telspec, which supplies products for more traditional fixed- wire telephone systems (the phone in your house) and Filtronic Comtek, which supplies equipment for mobile phone systems (the phone in your briefcase or car).

These shares may not suit staid investors. Telspec's share price has risen from 160p to 408p since the December 1993 flotation; Filtronic Comtek, floated last October when sentiment in the new-issue market had been shaken by well-publicised disasters, has seen its shares rocket from 105p to 260p. Telspec is on a historic price-earnings ratio of 28, roughly double the market average. Filtronic Comtek is on a p/e, based on fully diluted earnings for the year ended 31 May 1994, of 108. Pricing details for Rainford Group will be announced on Friday, but are expected to put the shares on a historic p/e, for the year to 31 March, in the high teens.

These prices may look like investor enthusiasm gone mad, but they are backed by remarkable growth in turnover and profits. Telspec has recently reported sales and profits roughly doubling for calendar 1994. The order book has also doubled on the year to £62m, mostly for delivery in the current year. Although hefty investment has pushed the group into debt, the chief executive, Garth Riley, says strong cash generation will quickly eliminate borrowings.

Filtronic Comtek makes the specialist filters which go into mobile-telephone base stations. It supplies all the leading equipment providers, such as Nokia, AT&T, Motorola and Northern Telecom, and network operators such as Cellphone, from factories on both sides of the Atlantic. It is racing to build new factories in both the UK and US to more than quadruple capacity in the face of soaring demand. Trading profits doubled in 1993, quintupled in 1994, and the first half of 1994-95 has produced profits well ahead of those for the whole of the previous year. At this rate of progress even a sky-high historic p/e soon comes down to manageable levels. Analysts believe the p/e could drop below 20 two years from now, when 1996-97 results are reported.

Rainford arguably has a less exciting product range, but there is no arguing with the growth. Turnover in telecommunications, far and away its dominant division, has grown from £5.2m in 1991-92 to £38.2m for the nine months to 31 December 1994. Estimated pre-tax profits for the year to 31 March are estimated at £5.25m against £l.5m the previous year and £325,000 for the year to 31 March 1992. Further substantial growth looks likely for the current year to March 1996, with no sign of any loss of momentum in the mobile phone industry.

Deregulation is opening up markets to high-spending competition. Old- fashioned analogue technology is giving way to digital technology. High- population developing countries in East and South-east Asia and South America are leapfrogging old technologies to install state-of-the-art communications networks to support their fast-growing economies.

This growth should continue. Rainford's pathfinder prospectus suggests the number of subscribers to cellular telephone networks in Western Europe, the US and the Asia/Pacific region will rise from around 41 million to more than 106 million between 1994 and 1999.

A European Union directive says that each member country should have one PCN network (for consumers) and two GSM networks (for business). Only the UK and Germany currently meet this requirement. In the US, an auction taking place for PCS licences (the American equivalent of PCN) is attracting billion-dollar bids.

Strong demand is not confined to the cellular networks. Telspec has a fast-growing business supplying products that allow operators to improve productivity of fixed-wire networks, in order to service more subscribers without the expense of digging up the roads.

It is developing new lines to carry data as well as voice traffic in ISDN networks. Important orders have been won from two big European countries.

Analysts project profits rising from last year's £6.6m to £11m and £14m, which would bring the p/e down close to the market average for a company with far-above-average prospects. All three stocks look exciting.