Shares: Big steps for smaller fry

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The Independent Online
THE START of 1993 has seen some sizzling performances by smaller companies with both private and institutional investors scrambling to buy. Inevitably there has been some indiscriminate activity which will lead to burnt fingers.

Penny shares are particularly hazardous because of their appeal to the unsophisticated, as the January performance of Brent Walker indicates with a roller-coaster rise from 4p to 16p and back down to 8p. The trick when buying a share which is flying is to be sure that something exciting is happening to the company, not just the shares. One of the most amazing performances so far this year has come from a UK- quoted company, Danka Business Systems, which does all its business in the US. Since November the shares have raced up from 200p to 505p (they closed unchanged after some apparent profit-taking on Friday).

Danka is gaining recognition for what it is, an exciting growth company with a very good future which was absurdly cheap before the shares took off. Since 1988 earnings per share have nearly trebled from 10.1p to 29.3p and are expected to keep growing at a 25 per cent annual rate this year and next. On that basis a prospective PE around 16 does not look excessive.

The key to Danka's success is that it has grown organically and by a string of acquisitions to become the second largest UK company that sells - and, more importantly, services - copiers and fax machines in the US. The profits come not from selling the machines, but from maintaining them and supplying toner and other consumables to a growing base of installed machines. Investors who have something similar over here should note that Danka's contracts are for one year only, so customers can only be retained for the long haul by quality of service. Potential for further growth is massive because the company only has a tiny share of a fragmented market in which many of the operators don't make much money.

Another share on a rocket trajectory is Dawsongroup, a truck rental, sales and contract hire specialist which I wrote about last February. The price then was 77p, having already shot up from a 1991 low of 13p - but anyone who thought the fun was over would have been wrong, since they are now 189p and set to motor still further. The engine behind this recovery has been a dramatic turnaround in the market for short-term rental where there is talk of shortages. Both rates and utilisation levels are rising.

Dawsongroup stunned analysts by reporting half-year profits of pounds 1.97m against a pounds 197,000 loss a year earlier. Forecasts for full-year 1992 have recently been upgraded from pounds 4m, implying a PE in the high teens for a company which is likely to be one of the more spectacular beneficiaries when the real economic recovery arrives.

A share which will appeal to some for its combination of solid investment fundamentals and a potentially huge speculative kicker is Boosey & Hawkes, the music publisher and instrument manufacturer. The shares fell recently when a good set of interim figures was accompanied by cautious comment that deepening world recession meant that profits growth was going to slow from the 20 per cent rate of recent years. A PE of perhaps 16 on likely 1993 earnings (with calendar 1992 earnings to be reported in early April) does not look unreasonable.

But there is an unusual wild card for shareholders because the company has begun a lawsuit against Walt Disney over the use of a truncated version of Stravinsky's 'Rite of Spring' in the film Fantasia. It all relates to an alleged copyright infringement of the composition, for which B&H now owns the rights, in what has become the best selling video of all time.

The legalities are complex and Disney is resisting the claim strongly. But Joly Pope, a US lawyer, claimed that an action by Peggy Lee over Disney's use of the singer's voice in its video of Lady and the Tramp had resulted in a multimillion-dollar settlement.

(Photograph omitted)