Two floats that will ride the waves

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The Independent Online
BUYING shares in a newly floated company on the first day of dealings - as those with memories of the roaring 1980s will testify - can be a highly profitable investment strategy: so often new issues are underpriced to ensure a glowing welcome. The approach, though, is not entirely risk- free. At times the opposite happens, with pre-launch excitement leading to the shares opening high and then falling, sometimes dramatically. The trick, as always, is choosing the right shares.

Two new issues which look full of potential are software specialist FI Group, and printedcircuit board manufacturer, Symonds. Placed at 235p, dealings begin in FI on 10 April and a substantial premium looks likely since the issue was at least six times oversubscribed. Symonds is a slightly different case. The shares were suspended at 60p on the news of an acquisition which chairman Rod Akrill describes as a "reverse takeover" (the acquired company being bigger, at least in profit terms, than its acquirer). Financed by a one for one placing and open offer at 50p, the shares resume dealings on 18 April. The equivalent price, adjusted for the offer, would be 55p but again a significant premium is likely.

FI's computer services speciality is the management of applications software for large companies. The company looks after all the support, development and maintenance of Barclaycard's core business card-processing systems, freeing up Barclaycard's staff to work on strategic developments. In some cases this type of outsourcing can be taken a stage further with FI taking on staff from the client in a long term "partnership". Two such contracts were signed, in 1993 and 1994 respectively, with Whitbread and the Co-operative Bank.

The company is floating on the crest of a wave, with pre-tax profits having risen from pounds 1.3m in the year to 30 April 1993 to a forecast pounds 4.6m for the year just ending, and the strong growth seems likely to continue. The overall market is expected to expand by around 20 per cent a year, but FI may gain further market share and beat that figure. In addition there is scope for margin improvement. Presently half the group's staff are freelances paid at high rates; if it can win more "partnership" contracts it should be able to raise the proportion of permanent staff and lower costs. In addition the growth of business leads to better overhead recovery.

FI has other attractive features. Share ownership is widely spread through the company and arrangements have been made to similarly motivate newly recruited staff. Unusually, 50 per cent of the staff are women including the founder, the chief executive and a majority of the board. Since much of the work for clients is done on FI's premises there is scope for remote management of client accounts from low-cost locations anywhere which could achieve dramatic cost savings.

Symonds does not have the glamour or the quality of earnings offered by FI but it too looks set for an exciting future. In 1993 it was a struggling engineering business when Rod Akrill acquired a significant stake and brought in Jim Symonds (from the family, but a new broom none the less) as chief executive. They soon disposed of Sym-onds' lower-margin activities leaving the focus on the manufacture of cabinets and racking for the electronics and telecommunications' industries.

More importantly they have made a series of acquisitions to make the group a significant player in the market for prototype and pre-production printed-circuit boards. This is another form of outsourcing.

Customised, and highly complex, printed circuit boards are used in a huge range of industries. Companies design them in-house but increasingly farm out to third-party specialists the tasks of verifying that the design works, making prototypes and testing for mass production.

In its latest deal Symonds is acquiring Zlin Electronics for a total pounds 11.5m. In the three years to 30 November 1995, Zlin turn-over has grown from pounds 2.75m to pounds 6.70m and pre-tax profits from pounds 89,000 to pounds l.98m. That compares with Symonds which made pounds 605,000 on sales of pounds 6.9m in the year to 31 March 1995, but is forecasting pounds 1.4m profit for the current year. Zlin specialises in the high margin activity of fast turnaround of prototype boards for its customers.

At 55p the enlarged group would be capitalised at pounds 26.4m against the prospect of combined pre-tax profits around pounds 4m for the year to 31 March 1997. That implies a p/e around 10 which looks excellent value for a group well placed for further significant growth.

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