Smaller Companies: Strong potential but high risk in Phonelink issue

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FIRST dealings today in Phonelink should test the boundaries of the possible. Valued at pounds 55m by a placing at 155p, traditional measures scarcely apply to a company that made a profit of only pounds 31,000 last year. More even than recent issues such as Tadpole Technology and Division this is a step into the unknown.

There is no denying the appeal of Phonelink's products, all of which are broadly speaking software devices to provide fast and accurate information retrieval. The most recent development is a substitute for BT's directory inquiries service. Twice as fast and half as expensive, the package has obvious appeal to big corporate users.

BT liked the product so much that it signed a marketing deal with Phonelink. It will be sold as BT Teledirectory under a nine- year contract, with Phonelink receiving a payment per inquiry. First sales are expected in January 1994.

That will be the bread and butter of the company, but more exciting is an extension of the same technology into an information retrieval service aimed at the mass market.

Used on ordinary PCs, Tel- Me will allow anyone who pays an annual fee of about pounds 300 (a lot less for companies buying in bulk) to access a wide range of databases. Deals have already been negotiated with the AA, the Press Association, the Ordnance Survey and British Rail.

So, for example, a subscriber will be able to access rail timetables for the whole country or details of hotels within a certain radius of any given point. They will be able to catch up with the latest news headlines or decide on the best route for a car journey. Private investors will have access to company information, including charts and graphs.

Rudimentary versions of some of these databases already exist but the speed and quality of graphics provided by Phonelink is a step forward. Trevor Burke, chairman, says everyone he has shown the system to wants one.

That is the good news. The worrying aspect of the flotation is that even to put the shares on a prospective p/e of 20 to reflect the company's bright prospects would demand pre-tax profits of pounds 4m. For the year to March 1994 they will be nowhere near as high and in the following year they will depend on whether the products are launched on time. There is a lot of uncertainty.

Phonelink started trading only in 1989 so it is impossible to judge its husband-and-wife management team. Like many technology companies it is floating because it needs funds to tide it over a gap between the development of a product and the start of a decent flow of sales.

This means that the shares represent a rather high risk. There is nothing in the price to compensate and, judging by the market's reaction to recent similar issues, private investors are likely to miss the boat. Better to watch from a distance and wait for the initial euphoria to settle.