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Smaller Companies: Silvermines' golden future

Silvermines has come a long way since it was formed to explore for lead and silver in Ireland several decades ago, writes Richard Phillips.

The present company is a distinctly technology-driven beast, with two eye-catching activities - broadcast and telecommunications, and motion technology, as it is dubbed, the production of electrical motors, mainly for car- powered steering.

Last week, the business reported its fourth record set of interim figures in a row. Profit before tax soared 68 per cent to pounds 2.6m, on sales ahead 37 per cent to pounds 37.7m. That saw earnings per share rise 30 per cent, to 2.23p, and the dividend increased 29 per cent to 0.45p.

Yet go back to December 1995 when the shares were 55p, and not a lot seems to have changed - after a brisk canter up to around 90p the shares are the same price now as they were before.

So what's gone wrong? Well not a lot, at least superficially. The company exited its last property business recently, freeing up capital to reinvest in higher growth businesses. That prompted a downgrade from an Irish broker, but the argument that profits next year will fall seems flawed. There has also been the general malaise afflicting smaller companies.

However, deeper fears may have arisen around the money raised in a pounds 12.6m placing last year, to buy Continental Microwave, a transmission equipment manufacturer. While Continental made a storming contribution to profits, there are questions of dilution. And peeking behind the headline figures, cashflow is negative. It seems to be running a deficit of about pounds 1.4m at present - up from pounds 389,000 a year ago. The jump is largely accounted for a rise in stocks, mainly at Continental Microwave, ramping up for the surge in sales it is experiencing.

However, the cashflow situation should improve, as Continental adjusts to its new owners.

Managing director Clem Jansen, with many years at GEC behind him, can steer a steady course over the next few years. In 1998, one can expect profits to start flowing from its joint venture with Echlin of the US, to develop a revolutionary new motor for power steering. Aviation, with the purchase of the avionics and accessories division of Hunting for pounds 2.15m, is poised to make a strong start at the group.

There is also potential in digital broadcasting, to add further spice to a well-balanced range of businesses.

At their current level, the shares offer better value than many comparable enterprises. Looking ahead, they trade at little more than 12 times full year earnings for the current year, and perhaps nine times 1998's results. If that is so, they could well be a steal.