Smaller Companies: Oceonics on course for brighter prospects

THE strong performance by smaller companies' shares this year has made it increasingly hard to find undervalued situations. Since January, the

FT-SE SmallCap index has outperformed the market by about 15 per cent and could extend its lead as the economic recovery quickens.

However, shares in Oceonics, the marine services group, appear to have been overlooked by the market. Last Friday the company reported a fall in taxable profits from pounds 2.7m to pounds 2m for the year ended 31 March, on sales up from pounds 29m to pounds 30m.

At first glance, these are hardly the figures to set investors' pulses racing but they mask a sea change in the company's underlying prospects. Three years ago Oceonics ran into severe problems, which stemmed partly from a disastrous expansion into a German construction business.

Since then a new management team has scaled back its operations. It is now one of the world's leading providers of marine surveying and positioning services. The group's satellite-based technology is used to route pipelines, underwater cables and in hydrographic surveys, including some for the Royal Navy.

The profits decline was largely due to the impact of an unusually big pounds 16m contract on the previous year's performance. Its 1992/93 result was also marred by a pounds 141,000 exchange loss following sterling's devaluation in September, which the company treated as an exceptional item.

However, one of the group's key attractions is its strong cash inflow, which rose from pounds 3.2m to pounds 3.9m and left it with net cash of pounds 2.1m.

It also follows a conservative depreciation policy, which led to a high pounds 2.6m ( pounds 2.2m) charge against operating profits.

Moreover, the results were accompanied by a pounds 4.4m preference share issue, which will help to remove uncertainty about its future. The issue was aimed at redeeming its existing pounds 3.5m preference stock and paying off an estimated pounds 1.1m in accrued dividends related to those shares. The dividend had accumulated in previous years because Oceonics did not have sufficient reserves to meet that liability until now.

The move should also enable it to resume paying a dividend on its ordinary shares from this year. Although analysts are forecasting only a marginal improvement in taxable profits to about pounds 2.3m this year, earnings are expected to jump from 0.6p to 1p due to a low tax charge.

That rates the shares, at 11p last Friday, on a modest 11 times prospective earnings. Investors with a penchant for asset backing should also note that Oceonics shareholders' funds were pounds 7.5m, almost half its current market value. It is expected to finish this year with an unchanged net cash pile of about pounds 2m, putting it in a strong position to finance any acquisitions.

Anthony Henfrey, chairman, said: 'Our objective is to create a more diversified offshore services group. The board believes that significant opportunities exist to build upon the niche range of precision navigation and marine surveying services which we now provide around the world.'