SMALLER COMPANIES: Coin it with Quadramatic

Engineering firms can be capital-intensive businesses - but if they are also cash generative, they can be a sure fire investment bet, writes Richard Phillips.

That would appear to be the case at Quadramatic, where cash at the year- end amounted to a pleasing pounds 1.9m, up by pounds 800,000 from the same time a year ago.

The company is also out of the Messrs Gartland, Whalley and Barker stable, which has spawned several interesting situations. The three have resigned from the board, and sold their 15 per cent stake, but a new non-executive chairman, Tony McCann, has joined. Glenn Powers has left as finance director, but a replacement should be in situ in the new year.

Once a new financial director is in place, an acquisition of up to pounds 20m could be on the cards, given the cash generative nature of the business. The current board is keen to build on the three core divisions - specialist moulded products, instruments and coin handling.

Much of Quadramatic's winnings come from its sales of coin handling equipment for the gaming industry, where it is a leader in Europe. It also exports to North America, and is on the verge of launching a new product for that market: an innovative coin validator that can handle 10 coins per second.

Special mouldings includes making the windows in mobile telephones, most notably for Ericcson and Nokia. There were quality control problems with these two contracts last year, but they have been ironed out now.

Instruments is also hugely profitable. Sales of pounds 21.5m led to profit before interest and tax of pounds 4.84m.

Margins of around 20 per cent for the group as a whole look very appealing. According to stockbrokers Greig Middleton, sales could increase to pounds 80.5m, with pre-tax profit rising to pounds 15.5m.

Since mid-1996, the shares have been in a process of drift and decline, and were further hit by revisions to stockbrokers' forecasts. The share sales by the three principals in January also soured sentiment.

The price now is undeniably low. According to Greig Middleton, the shares, at 205.5p trade at more than a 30 per cent discount to the market. Granted, there are some residual risks - obtaining a new finance director being one. But on this rating, that leaves the shares trading on a price earnings ratio of 10 times in 1998, if earnings of 21p a share are achieved.

That seems unambitious, given earnings of 19.5p in 1997. The shares are a buy.