The Investment Column: Dialog may soon start to deliver

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The Independent Online
YOU have to hand it to Dan Wagner. In four years, the whizz-kid chief executive of Dialog - the company formerly known as MAID - has turned what was a minnow in the media business to the world market leader in providing electronic information to companies.

Sadly, Dialog's shareholders have yet to see the benefits. Over the course of its turbulent stock market life, Dialog has just about performed in line with the rest of the market. Certainly that is no disaster, but not quite the returns expected from such a supposedly fast-growing business.

The deal that secured Dialog's market position was the pounds 261m reverse takeover of Knight-Ridder Information late last year.

That gave Dialog control of a database containing some 6 billion pages of text - more information than is currently available on the World Wide Web.

The logic of the deal was fairly simple. First, Dialog would shave US$35m off the cost base. Then, by using its existing sorting technology, it will try to get existing Knight-Ridder customers to make more use of the database.

So far, Mr Wagner is as good as his word. Full-year 1997 profit figures, released yesterday, were meaningless because they included just six weeks of the KRI acquisition. However, the cost savings have all been made and KRI's declining sales - the legacy of neglect by its previous owners - reversed. A peripheral business should be sold soon, raising at least $20m (pounds 12m).

That said, the jury is still out. Dialog chose to fund a large chunk of the KRI deal with debt, leaving it with $180m of junk bonds with scary covenants on its balance sheet. The key to paying that off and getting the company back onto an even keel is to squeeze sales growth out of KRI.

Given that the costs of maintaining the database are largely fixed, a large proportion of any additional revenue Dialog can generate will come straight through as profit.

Through forecasts are largely guesswork, analysts have pencilled in profits of about pounds 24m for the coming year, which would put Dialog shares, down 11.5p yesterday to 152.5p, on a forward PE ratio of less than 10.

If Dialog can hit that targets, the shares are cheap. But until Mr Wagner delivers, the question marks remain.