Shares: Hard-time performers promise better days

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The Independent Online
IT MAKES SENSE in a time of cautious stock markets to look at companies where positive developments have helped their shares move ahead - even when the indices are becalmed. Three companies which look interesting are Denmans Electrical at 648p, Spandex at 238p and Shorco at 144p.

Readers should be aware that shares in Denmans and Shorco, in particular, are thinly traded and can move dramatically on minimal buying.

Denmans is a solid family business with a good story to tell, which is consciously seeking a higher profile with the investment community after years of being barely visible. The company's speciality is distribution of electrical fittings to smaller trade buyers. It typically offers less expensive secondary brands and own label products, some of which it now manufactures in-house.

In an industry where pricing has been obscured by complex discounting, the company publishes a regular catalogue which shows prices net of discounts for a huge range of fittings. The catalogue is distributed to around 25,000 customers.

After an early brush with recession at the start of the decade - when pre-tax profits almost halved to pounds 1.22m - the group has been on a steady recovery path. The results for the year to 30 September 1993 were just a whisker short of the 1989 profits record, at pounds 2.04m against pounds 2.08m.

The group's impressive performance reflects continuing expansion of the branch network from 37 to 45 outlets in the last two years, as well as tighter financial controls and management information systems introduced by John Moulton, who was appointed as the new finance director in 1991.

This sharpening up of the cost structure is now meeting improving demand as activity picks up in the building trade. Forecasters are looking for profits to reach pounds 2.4m this year and pounds 2.8m for 1994/95. This would drop the price/earnings ratio to about 15. That looks like solid value, but my guess is that both forecasts will prove to be conservative.

In the future, too, is the prospect of a dramatic stimulus to the electrical fittings market with the introduction of new applications controlled by microprocessors.

New technology is also one of the factors that makes Spandex, the signmaking equipment supplier, an investment with high potential.

Over the last few years, profits growth has lagged behind increases in turnover as the company has borne the costs of putting in place a pan- European distribution network against the background of a deepening recession. But now the network is substantially in place - in perfect time to benefit from a revolutionary product, the Gerber Edge, which enables the group's customers to create signs more quickly and easily - and with three-dimensional effects. The product was launched in June last year and turned a first-half sales decline into a strong increase for the full year - while profits jumped to pounds 5.45m after five years of being stuck between pounds 4.1m and pounds 4.8m.

The other great attraction of Spandex is that - shades of Gillette and its razor blades - the group makes most of its money from highly profitable follow-up sales of self-adhesive vinyl that signmaking contractors need to make signs for consumers.

The signs that end up on shop fronts and the sides of vehicles are made with computerised equipment developed by a hugely successful US company, Gerber, which has an overwhelmingly dominant position in the world market.

Spandex has the European rights to Gerber's products in what has proved a mutually rewarding relationship. Forecasters are looking for profits to reach pounds 6.5m this year and pounds 7.5m next, but again these could prove conservative. The current year, for example, will benefit from acquisition of a French distributor that made profits of pounds 400,000 in its last full year and is described as trading well.

Last and conceivably most explosive of the three is Shorco, a relatively tiny company which hires out laser and electronic surveying equipment and systems for shoring up the walls of construction trenches. Its customers in the building industry have been having a terrible time, and this dragged down profits to a low point of a little over pounds 200,000 in 1992.

But the group has demonstrated its confidence by maintaining the dividend and is now on the recovery trail with profits up 37 per cent in 1993 to pounds 284,000, a good start to the year, and price increases for some categories of equipment for the first time in four years.

In 1989, the group made pre-tax profits of nearly pounds 1m on turnover of pounds 6.2m against the pounds 7.1m reported for 1993 and what should be a significantly higher figure this year.

Many competitors have been eliminated during the recession, while pressure for job safety has intensified the requirements about having trench walls properly supported.

It won't happen this year, but it should be only a matter of time until that pounds 1m record is surpassed, creating huge scope for a group currently capitalised at just pounds 4.5m.

(Photograph omitted)

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