THE INVESTMENT COLUMN: Compact hopes for Dorling

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The Independent Online
A 50 per cent jump in pre-tax profits to £5.3m at the multi-media publisher Dorling Kindersley suggests that the company has finally put its distribution problems behind it. With any luck its shares' roller- coaster ride may settle down.

Certainly investors liked the numbers, pushing the share price up 16p to close at 319p yesterday as the potential for a company with some of the best multi-media products on the market and a proven track record in the retail sector sank in.

Floated in 1992, the high-quality print and electronic publishing company, known for its lavishly illustrated adult and children's books, saw its shares soar initially on hopes for its compact disc, read-only memory (CD-ROM) technology. Specialist videos and state-of-the-art, interactive multi-media products such as the best-selling Essential Human Body, were viewed as a profitable adjunct to the traditional publishing business.

The shares hit a high of more than 350p, but plunged to 260p after the company issued a profit warning in late 1993, due, it said, to computer problems at the third-party distributor, Tiptree, which led to lower-than- expected sales in the UK.

As usual when a stock attracts high levels of investment hype, both high and low were probably overdone.

Dorling, chaired by Peter Kindersley and 19 per cent owned by Microsoft, is betting strongly on the high-margin CD-ROM market, set to represent 25 per cent of turnover within two to three years.

Growth figures suggest that it could be a wise bet. By the end of 1994, 14 million US households had CD-ROM players, up from only four million a year earlier. The UK market has some catching up to do, but even here, 500,000 households have the hardware, and that figure is forecast to rise sharply. The European CD-ROM software market might be worth as much as US$4bn (£2.6bn) by the end of 1998.

Dorling's big push into interactive publishing looks well timed, given rising paper prices and the growing appetite for CD-ROM gadgets in the US and Europe. The only cloud is the likelihood of sharp price-cutting in the increasingly competitive UK CD-ROM market.

At the current price, and on forecast profits of £12.5m, the shares, which trade on a forward p/e of more than 30 times, are looking forward to extraordinary growth. The market will certainly provide it - the gamble is how big Dorling's share will be.