Shares: Prices come back into range: Market caution is giving investors a second bite at floating cherries
Sunday 27 March 1994
Recently floated companies such as Radstone Technology and Parkside International, engaged respectively in defence electronics and packaging, have seen their share prices dragged steadily lower in a sliding market to the point where they are near or even below the original placing prices. Investors, in effect, are being offered a second bite at the cherry on shares that should have exciting medium and long-term potential.
The same goes for currently floated companies that have to lower their sights on pricing to arouse interest in a more cautious investment climate.
A flotation that should have considerable potential is the Robert Wiseman milk business. A first reaction might be that it would be hard to imagine a business with less potential than milk. Milkmen on their rounds are fast becoming extinct and the milk most of us consume is a far cry from the creamy richness of those earlier, less health-conscious days.
But it is precisely those changes that make Wiseman interesting. The Scotland-based family-run group decided a decade ago that the future lay in super-efficient operations that could supply independent and multiple retailers with milk at the sort of prices they could pay while still making good profits.
It centralised production in a huge state-of-the-art facility, branded every part of the operation with a logo like the pattern on a Friesian cow, and stormed to a 20 per cent-plus share of the Scottish milk market - with profit margins around 9 per cent. Now it plans to bring the revolution to England, which is some way behind Scotland in the shift from doorstep delivery to buying from supermarkets in cartons and plastic bottles. It has acquired 10 acres in Manchester, where another state-of-the-art facility is to be constructed for an assault on the northwest market.
The betting is that its present tiny 2 per cent share of the total UK market is going to rise sharply, at the expense of smaller rivals rather than the bigger milk suppliers such as Unigate and Northern Foods.
Dealings begin on Monday and the shares would be well worth buying at a price not too far from the 100p placing level.
Radstone Technology, at 110p, is trading at a significant discount to its 125p placing price set in late February at the peak of the boom. Normally I regard a decline below the issue price as a clear warning signal, and investors who share that concern could wait to buy until the price moves above the issue price again. But in this case it looks understandable.
The shares are down by 12.2 per cent from their 131p peak against a 10.8 per cent decline by the FT-SE 100 index. The company is a world leader in supplying components for embedded computers in defence and industrial equipment used in rugged environments.
Most sales are overseas and the company has increased profits substantially since a management buyout from Plessey in 1988. A key factor in the growth of the business has been a shift by governments and defence industry giants to constructing defence systems based on standardised components rather than designing everything from scratch.
The advantage is that off- the-peg components are vastly cheaper and relatively risk-free, and production bugs have all been ironed out. On a prospective price-earnings ratio of 14.6 for the year ending 31 March, the shares look attractive.
Parkside International at 112p, against a peak 125p and a flotation price of 110p, has some characteristics of a packaging version of Watmoughs, the Yorkshire printing superstock. Watmoughs has become a key player from tiny beginnings, by investing massively in the latest printing technology to service big corporate customers that are contracting out their printing arrangements.
Parkside, in proportion to its smaller scale, is investing on an equally heroic scale to satisfy the sophisticated packaging requirements of such companies as Coca-Cola, Anchor Foods and Walker Smith.
One risk factor is that 60 per cent of sales come from the 10 largest accounts - but that compares with a similar proportion from five accounts at the time of the 1989 buyout.
On a prospective p/e of 17.7 on forecast earnings for the year to the end of February, the shares look worth buying.
Another recent issue that merits attention is Finelist, the auto parts distributor. Trading as Autela, and run by 35-year- old Chris Swan, the group was the subject of two successive management buyouts in 1989 and 1991 - with the second of those propelling Mr Swan out of operations to become managing director.
This inaugurated a period of explosive growth in sales and profits. Sales since 1990 will have roughly doubled on projections for the year to 30 June of sales reaching pounds 23m, and profits will have grown from pounds 273,000 to a forecast pounds 2.3m for a prospective p/e of 19.5, with the shares at 148p against a placing price of 130p.
At the time of flotation there were 73 outlets supplying so-called hard parts (clutches, brake pads, exhaust systems and the like) to independent garages and repair businesses. That compares with 59 outlets in 1990. Swan hopes to grow by acquisition, and has already bought two outlets for about net asset value since the float. His medium-term target is 120 outlets and he says he can add 20 to the network with no corresponding increase in group overheads, which should be good for profits. The shares look an exciting investment.
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