Smaller Companies: Dorling distributes fear among its investors

AS if there were not already enough fears about value-added tax hanging over the publishing sector, Dorling Kindersley really jangled investors' nerves the day before the Budget by warning that the Christmas trading period would be disrupted by problems at its books distributor.

That flushed out the sellers. The shares, amid some relatively heavy trading for a normally tightly held stock, dropped 9 per cent to 293p. Those investors who stood firm, however, have seen the shares recover to 318p, just 4p below where they stood before Dorling dropped its bombshell on the market.

None the less, the deserters did have a case.

The message from Dorling, perhaps because it has yet to acclimatise to the ways of the market it joined only 14 months ago, was more than a little vague.

For a company whose main business is communicating information through illustrated books, such an uninformative statement about the potential damage from its distribution problem was inexcusable.

In reading between the lines last Monday, investors could have been forgiven for believing that the disruption caused by computer problems at Tiptree Books, the distributor owned by Random House of the US, was severe.

For one thing, Richard Harman, the managing director, said he could not quantify the problem. And in the same breath, he said a claim was being assessed by Arthur Andersen, the chartered accountants, and would be pursued against Tiptree.

Additionally, he said the problems at Tiptree, ironically winner of the British Books Awards distributor of the year accolade in February, were continuing despite round-the-clock working to clear the backlog.

The disruption came to light in August, the month after Tiptree installed its new computer system. Why did it take Dorling almost four months to tell the market?

And why did Dorling make no reference at all about Tiptree on 28 September when it released its maiden annual results?

No news is not necessarily good news in the eyes of the market. It has been proved time and again that it is better to forewarn - and the opportunity was there - than to let things fester.

While Dorling can not quantify the financial effects of Tiptree's problems, BZW, house broker to Dorling, wasted no time in reducing its profit forecast for 1993/94.

About 13 per cent has been sliced off BZW's pre-tax projection, to pounds 10m. But who is to know whether that cut is too much or too little? BZW's numbers can only be viewed as a shot in the dark. Dorling's subsequent additional attempts last week to put the lid on the market's fears were also straight out of the manual for poor investor relations.

The UK represented only 30 per cent of Dorling's sales, Mr Harman said. And Christmas represented 60 per cent of sales compared with 75 per cent for other publishers.

Both figures, whichever way they are viewed, are high and cannot be dismissed that lightly. In the short term, Dorling has a problem.

The long-term trading outlook for Dorling, analysts agree, remains good. But until the scale of its distribution problems is apparent avoid the shares.