Shares: Fallen stars rise again: Two small companies that rode the Eighties rollercoaster are clawing their way back to contention for the Nineties

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The Independent Online
SHARES of smaller companies have been falling for nearly five years in a decline comparable to that between 1972 and 1976. But buying the right smaller companies at the bombed-out price levels of 1976 was the market equivalent of winning the pools.

Investors picked up such shares as Polly Peck and First National Finance for pennies and saw them climb to 400p or more in the boom of the Eighties. A betting man might suspect that now is a good time to buy depressed shares for what could be a spectacular run in the Nineties.

I have picked two shares that were as typical of the Eighties as First National Finance was of the property-mad early Seventies. The first is Filofax, of the famous ring-bound personal organisers; the second is Serif Cowells, which gave yuppies something to do after dinner with the general knowledge game Trivial Pursuit.

Both companies have endured spectacular falls since the frenzied summer of 1987. Filofax shares fell from over 200p to 13p at the low point; Serif Cowells, which peaked at 188p in 1988, hit a low of 1.75p as recently as April. But both are into convalescence, with Filofax back up to 41p and Serif Cowells at 10.5p. Famous last words, but there should be no question of either going bust.

The more remarkable recovery has been by Filofax, which is trading so successfully that two to three years from now it may be making record profits as the owner of a highly rewarding global brand. This is a far cry from 1990, when it reported reduced turnover and a pre-tax loss of pounds 1.55m, and was in such straits that control was acquired by the Tranwood Consortium Fund, which had to underwrite a pounds 2m rescue rights issue.

As important as the new funding were a change of management, with Robin Field taking over from David Collischon as chief executive, and a change of strategy. The problem was that while the market for ring- bound organisers was still growing at a rapid rate, the company's products became far too expensive and its share of the spoils nosedived. Under the new strategy, cheaper, more popular soft leather was introduced, and the product was repositioned to sell at a 15 per cent premium to rivals, rather than twice the price.

While the company now needs to sell 500,000 organisers to generate the level of revenue that used to come from 200,000, gross margins are good, sales and market share are growing, and profits are soaring.

Current-year profits are set to exceed pounds 1.7m, and with virtually no tax to be paid, Filofax is on a prospective price-earnings ratio of not much over five. That looks extremely cheap for a company with a sizeable share of a global market still growing at perhaps 20 per cent a year.

Serif does not yet have such a strong story to tell. It ran into problems with working capital, arising partly from the loss of the rights to market Trivial Pursuit. Borrowings soared to more than pounds 6m, a proposed management buyout early in the year had to be aborted because of difficult trading, and then the company reported a loss of more than pounds 5m.

The response has been board changes, disposals and ruthless attention to costs and working capital, squeezing borrowings down to pounds 1.25m against shareholders' funds of pounds 5m. In the process, the group has emerged as a pure specialist printer with three subsidiaries: Spottiswoode Ballentyne, which prints such items as the binders for the Lloyd's List; Cowells, a security printer; and Craystons, which manufactures games, including most of the European edition of Trivial Pursuit. These subsidiaries generate turnover of more than pounds 20m, and costs are being cut.

Much capacity has been taken out of the printing industry, reinforcing the belief that it should become highly profitable when demand recovers.

Meanwhile, the whole company is capitalised at pounds 2.6m - roughly half shareholders' funds and little more than the profits expected in a good year.

(Photograph omitted)

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