The Investment Column : Hi-tech Pace enters at a gallop

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The Independent Online
Valuing a fast-growing company such as satellite- and cable-decoder maker Pace-Micro was never going to be easy but no one can have expected initial estimates of a pounds 200m market value to have been so comprehensively overtaken by events.

In grey-market dealings which started yesterday the shares jumped from a placing price of 172p to 202p, a sizeable premium when you consider that the starting price was itself considerably higher than recent expectations. At that level, the company is valued at more than pounds 400m and David Hood and Barry Rubery, Pace's founders, have joined the envied ranks of the rich-beyond-the-dreams-of-avarice.

Private client brokers, kept out of the issue by the book-building method chosen by BZW and Panmure Gordon, were responsible for most of the buying interest yesterday as they tried to get hold of stock to satisfy their small investor clients before dealings proper get going next week.

The result of yesterday's heavy turnover has been to catapult the shares to a rating which, even in the heady world of hi-tech stocks, looks pretty ambitious. On the basis of forecast profits of pounds 23m in the current year to next May, the shares are currently trading on about 25 times forecast earnings. Are they worth it?

Certainly Pace has an impressive position in a fast-growing market. It estimates that it makes one in every two satellite- and cable-decoders in the UK and perhaps a third of those sold throughout Europe. With the rapid transition from analogue to digital television services currently taking place that is a nice place to be.

Even more exciting is the imminent onset of digital terrestrial television in the UK in 1998. Viewers will all need special boxes to unscramble digital signals, creating enormous potential demand for Pace's receiving equipment.

An indication of the rate of growth in profits investors can expect, is that the company probably made no profit at all in the first half of last year but it has promised profits of just over pounds 18m in the year to May just finished. Against earnings growth of 33 per cent in the current year, a prospective p/e ratio of 25 does not look so steep.

Like all hi-tech investments, of course, Pace comes with a hefty health warning attached. It is unusual for a company valued at almost half a billion pounds to be so narrowly focused on one product area and it requires something of an act of faith to assume that electronic giants such as Sony will not elbow their way into the market if it proves lucrative. As ever, the biggest beneficiaries have probably been the institutions who got in at 172p, but if the rate of growth can be maintained Pace may also provide something for the ordinary investor.