Smaller Companies: A performance that is well worth copying

A HISTORY of unsavoury sales practices has left the photocopier industry in the doghouse. Users feel they have been mucked about by unfair contracts, with expensive get-out clauses, hidden in a sea of small print. The companies themselves admit that customers' gripes are often justified.

The City is little happier, with shares in quoted companies, such as Eurocopy and Southern Business Group, periodically hammered by fair trading inquiries and a drip-feed of bad press. The Office of Fair Trading is due to pronounce on unfair practices later this year. It is rumoured to be weighed down by the size of the task and unlikely to have anything to say before 1994.

Hardly an auspicious background for one of the stock market's most stunning performances so far this year. Shares in Danka have more than quadrupled in value since November, from a low of about 200p to 900p last Friday, at which level they were split into four units worth 225p each to help marketability.

But then Danka is unlike the rest of the industry. For a start it is an American company, which has a London quote only because Mark Vaughan-Lee, its chairman, spotted a neat tax dodge in the mid-Eighties - marrying profitable US companies with the attractive tax losses of UK shells.

Dan Doyle, Danka's ebullient chief executive, says the industry just does not have the same image in the US. The long contracts that have been the bane of UK office managers do not exist there. One-year contracts are standard and dealers maintain a healthy arms-length distance from leasing companies.

That and an attention to service have encouraged explosive growth. Turnover grew almost 15-fold between 1984 and 1992. Profits in the year to March jumped 63 per cent to pounds 17.5m. A performance-related bonus scheme for Mr Doyle was becoming so potentially expensive that he was persuaded to sell the liability back to the company.

Mr Doyle sees plenty of growth left in the US. The company is strong in its south-eastern heartland but there are plenty of gaps to fill. Its share of the fragmented market is still tiny.

Last month Danka took its first step into the UK market with the pounds 9m acquisition of Saint, a Hull company making profits of about pounds 750,000, following a long search for a UK company that shared Danka's 'clean' approach and could be used as a base for UK expansion.

Like its US parent, Saint, now renamed Danka UK, has seen dramatic growth over the past six years, with compound earnings growth of 35 per cent. Like Danka, it makes most of its money from high-margin service sales and it sells one-year renewable contracts, which keep customers happy.

For the year to next March NatWest Markets, the house broker, has pencilled in profits of pounds 26m for the enlarged group. It expects further growth to pounds 31m the following year. That puts the shares on a prospective p/e of 20 falling to 17, which sounds demanding but compares with earnings growth of 20 per cent to March 1995.

The shares, which arguably no longer belong in this column, are still good value.

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