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Shares: Recovery will recall radio days

IT MAY be early days for economic recovery but small company shares have the bit between their teeth and have been racing ahead, with market- makers reporting little availability of stock.

The change of mood looks soundly based and set to last. I have picked three stocks with good stories to tell and which could have a long way to climb, though buying may be difficult.

Classic beneficiaries of an improvement in business activity are radio stations. They have fixed costs so that increases in revenue go straight through to profits. Bristol-based radio group GWR, at 463p, has been using the recession to expand by acquisition while cutting costs. Between 1989 and 1991, profits fell from pounds 1.54m to pounds 340,000 while the dividend was slashed from 12p to 4p. But the gearing effect is now working positively, with advertising revenue climbing and profits more than doubling to pounds 721,000 for 1992.

Ben Thefaut of the stockbroker Albert E Sharp is forecasting (I suspect conservatively) further progress to pounds 1m for 1993 and pounds 1.3m for 1994.

But the wild card is that GWR has a 17.5 per cent stake in the stunningly successful national station, Classic FM, which is way ahead of schedule with an audience of 4.2 million. This is near the levels expected in 1995.

Another success story is Capital Industries, at 201p, which recently pulled off a brilliant deal with its inspired purchase of Samuel Jones, a Cambridgeshire-based label manufacturer. Label-making may not sound exciting but it is a growth market with big potential. Capital had been a largely financial and relatively unexciting business, making profits of pounds 1m to pounds 2m based on raising money under the BES and Enterprise Zone schemes. It needed to diversify, and Samuel Jones, whose ultimate ownership rested with a giant US multinational that apparently didn't understand the full value of a modest UK paper business, came its way for pounds 5.9m. Capital's management was already in the process of turning around from operating losses of pounds 3.9m for 1991 to an operating profit of pounds 2.4m for the first nine months of 1992. Samuel Jones makes half its sales in Europe and is a dramatic beneficiary of sterling's devaluation. The factory is working 24 hours a day, every day. On the estimate of the stockbrokers Beeson Gregory (again probably conservative), Capital is on a p/e of about 10 for 1993.

The last of my trio is Haynes Publishing, at 318p, which has the remarkable distinction of being market leader in its specialised field of car repair manuals in the US, where it has a 50 per cent market share, and Britain, where it has 90 per cent. The share price has roughly trebled from a low point in 1991 after a disastrously timed and costed venture into general publishing. Pre-tax profits in 1991 virtually disappeared and borrowings rose to pounds 5m as stocks of unsold books piled up at warehouses.

Haynes's founder and 62 per cent shareholder, John Haynes, appointed as group chief executive Max Pearce, the 48-year-old who had successfully built up the US operations. Fierce cost control and destocking has brought borrowings tumbling, and the group should be cash-positive before the end of the year. A rival in America has thrown in the towel and US profits have been storming ahead.

Profits for 1992 recovered smartly to pounds 2.4m and the odds are excellent that the result for the year to 31 May 1993 will beat 1990's record pounds 3.1m.

On earnings per share likely to be pushing towards 20p, the prospective p/e is in the high teens, which looks well justified.

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