Tunstall answers a cry for help

THE "demographic time bomb" waiting to explode in the world's developed economies is an opportunity for Tunstall Group, at 357p, a company that specialises in providing medical alert and home communications systems for the elderly.

The prospect of more older people means strong demand for the group's increasingly sophisticated systems. In addition, there are two areas of expansion that are poised to move into substantial profitability. First is taking the concept overseas. Second is using its production and sourcing skills for contract manufacturing for third parties. If all three legs of the business fire strongly, a profit leap may lie ahead.

Traditionally, the group has been known for its emergency communications equipment. Elderly persons linked to the system can call for help to one of 320 centres dotted around the country where details about them, their neighbours and medical histories are held on computer so that appropriate help can be summoned. Revenue, coming from a mixture of hardware and software sales and recurring maintenance income, has grown strongly over the years with 600,000 people linked to centres in the UK.

Growth has not been all plain sailing. In the 1970s and 1980s sales partly tracked the booming market for sheltered accommodation and suffered when that market collapsed in the early 1990s. There were also some unsuccessful diversifications. Between 1987 and 1992 pre-tax profits fell from pounds 5.9m to pounds 2.6m. In 1990 the management even attempted, unsuccessfully, to stage a buy-out.

Since 1992, Tunstall has moved on to a strong growth path, which looks set to continue. In the three years to end September 1995, pre-tax profits have more than trebled to pounds 8.3m net of exceptional items. Reported profits of pounds 9.6m for 1994-95 included a pounds l.3m legal settlement relating to a former acquisition.

A factor in the strong growth of the 1990s has been the use of more sophisticated versions of the group's systems to help with the Care in the Community programme. The old emergency service has evolved into the basis of a total support network enabling social workers and carers to monitor their clients, while the elderly are able to call up a range of services from laundry facilities to meals-on-wheels and gardening assistance.

Demand in some areas is described by the company as "acute". This is hardly surprising since forecasts suggest that by the early part of the next century the current ratio of 20 elderly people for every 100 workers in the population will have increased to 35 to 100.

UK growth has also been boosted by the recent acquisition of Modern Vitalcall, a business with some pounds 6m of sales, bought for pounds 2m. This strengthens the group's position in the related markets of door entry/access control and CCTV surveillance systems. Michael Dawson, the chairman, expects a significant profits contribution from this deal in the current year.

An exciting prospect for shareholders comes from the group's efforts to replicate this success overseas. The scope is considerable, although initial progress could be slow, given the need to adapt to local standards.

Nevertheless in the last year turnover for the international division reached pounds 14.6m out of total group sales of pounds 60.7m.

The profits contribution was modest because of heavy set-up costs. But overseas profits could now be ready to take off. In key countries such as Germany, Holland and Spain, the group has acquired part or wholly owned subsidiaries and Mr Dawson expects "substantial profits" over the next few years.

On top of that is the scope for the group's contract electronics business, Mion Electronics. Mion's profitability has been held back by the pounds 11m cost of setting up a new state of the art facility. But the scope looks enormous.

At November 1995 Mion had 430 employees out of a group total around 1,100 and sales were running at an annualised pounds 20m and set to increase substantially. That compares with the pounds 10.9m sales actually reported for the manufacturing division for 1995, up from nothing in 1991.

Analysts' forecasts suggest a sequence of profits reaching pounds l0.3m for 1995-96, followed by pounds 12.7m and pounds 15m. These will give an earnings per share progression of 21.1p, 25.8p and 30.5p. An implied p/e ratio of 11.7 times for the year to end-September 1998 looks excellent value - especially if those forecasts prove too low.

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