Shares: Shells that can hide pearls: Firms revitalised under their old names may well be worth watching
Sunday 06 March 1994
The latter can be particularly interesting because they often start trading with much less hype than a new issue and slowly build up speed with a growing fan club of investors who have become aware that exciting things are happening. I have selected shares in four companies that began as shells and are producing fireworks - with the potential for more action to come.
Coal Investments is suspended at 76p, so investors who like the story will have to wait until trading resumes on 29 March. The shares will come back ex a rights issue at four for 21 at 65p rights issue so the equivalent price would be 74.24p. The company is a vehicle for the talents of Malcolm Edwards, formerly commercial director of British Coal, and is being used to acquire licences to operate closed coal mines. The consideration takes the form of a royalty on production revenues so the money being raised, about pounds 11.5m, is for working capital to bring the mines back on stream.
Part of the funding is coming from an issue of loan stock and there are warrants attached to both that and the shares. Both look attractive in their own right. The loan stock is a zero coupon which, if held to redemption in April 1999, will yield 13.23 per cent. The warrants are exercisable at 85p until 30 April 1998 and should offer dramatic leverage for investors as well as raising a further pounds 5.3m for the company if exercised in full. If things do not work out, the warrants would expire worthless.
The company believes that it will be able to operate the mines profitably though there will be a substantial loss in the year to 31 March 1995 as it begins to build up production.
Outsiders expect profits to be approaching pounds 3m by 1997, dropping the p/e at the suspension price to around 11. Further corporate activity looks assured and Coal Investments could be a substantial business.
Another former shell growing at breakneck speed is Bill Cran's Birkby Group. The company joined the stock market in May 1992 when it reversed into Finlan Group and there has been a string of deals since then at roughly three-monthly intervals. The shares now stand at 278p. The group's core activity is converting disused mills in the Pennines area into low- cost, flexible accommodation for small entrepreneurial businesses who do not want the commitment of a long lease. Additional revenue comes from vehicle rental (the fleet now totals some 1,500 vehicles and trailers) and other forms of credit. Birkby is in the throes of its biggest move to date, with the acquisition of the quoted In Shops, mainly for shares but with a partial cash alternative. The deal will roughly double the group's size.
In Shops does something similar to Birkby but with small shopping centres. It recently acquired a chain of food discounters with the idea of using them to boost pedestrian traffic, thus enhancing the attractiveness of its 66 shopping centres. Rationalisation costs and the skills of the Birkby team in raising occupancy levels at In Shops suggest to outsiders that profits for the combined group could reach more than pounds 8m for a p/e a little over 20. That may look high but profits could continue to move ahead sharply if occupancy levels do improve.
Utility Cable at 37p is yet another product of the shell revitalisation skills of Luke Johnson and Stephen Hargrave, whose earlier successes include Pizza Express and Crabtree. The pair acquired a stake in the virtually defunct investment trust Baillie Gifford Technology. They then reversed into it two cable-laying companies and changed the name. Outsiders jokingly describe the group as the only UK quoted multimedia business that actually makes money. It is capitalised at only pounds 16.4m, small change in this industry. On the other hand, its contribution to the multimedia revolution is to lay the ducting for the cable franchise owners. Since it entered this business in 1989, after a management buy-out, it has won 13 contracts with all the top 10 cable companies and 15 on a fast-growth path. One observer is looking for a profits sequence of pounds 1.25m for the year to August 1992 followed by pounds 2.4m for 1993, pounds 3.6m forecast for 1994 and pounds 4.8m for 1995 to drop the p/e to 16. The latter forecast is described as conservative since it assumes that no more contracts are won yet only 12 per cent of UK homes are connected and huge sums are being committed by the cable companies.
Last but not least is the transformation of Berisford International at 229p by Alan Bowkett, whose purchase of the Magnet fitted-kitchens-and- doors business has been described as the corporate coup of the decade. Tom Duxbury privatised the business in 1989 at a cost of pounds 629m against profits of more than pounds 70m but at the worst stage of the cycle. Mr Bowkett has just bought it back from a group of badly bruised banks for a net pounds 26m against assets of some pounds 110m and turnover of pounds 180m. The business is breaking even just as the cycle seems to be turning up again. He has detailed plans for revitalising the business, which manufactures 75 per cent of the products it sells through a 230- branch network. Outsiders look for profits to reach around pounds 17m in 1995 with a low tax charge against a market capitalisation of pounds 340m. Before the deal Berisford was capitalised at pounds 120m against pounds 83m of net assets, which are steadily being turned into cash. It does not look too late to buy given the scale of the opportunity for the business.
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