City Talk: Vitec purchases should switch on earnings from the start

Richard Phillips
Saturday 06 June 1998 23:02

VITEC Group, the broadcast and photographic equipment manufacturer, has just acquired two wireless and audio equipment businesses. It is paying $10.9m (pounds 6.8m) for Systems Wireless of Virginia in the US, and pounds 2m for Hertfordshire-based Drake Electronics.

As Vitec has shown with previous acquisitions, the deals should enhance earnings from the start. Stockbroker Charterhouse Tilney has raised its recommendation on the business from accumulate to buy, and this week SBC Warburg Dillon Read is expected to issue a note setting a target price on the shares of 800p. They closed at 753.5p on Friday.

The group seems to trade on a multiple similar to traditional engineers at around 13 times prospective earnings. There is an argument that the group, with its media-linked markets, deserves a higher rating. Certainly, at these levels the shares look cheap for a business which serves some exciting, rapidly growing industries. Charterhouse estimates that it can produce pounds 48.6m in pre-tax profits for the current year, up from pounds 37.8m last time, and pounds 48.6m in 1999.

The FT-SE has taken a few breathers recently, although the market more than made up all the ground it lost on Thursday by the close of business on Friday.There is no sign of a sell-off, but the well-publicised declines in the wake of Asian and Russian turmoil may have served notice that the market may be on the brink of a standstill.

Looking back, such pauses have not been uncommon. Although current practitioners may be nervously awaiting a nosedive, there is no reason to suppose that this is the most likely outcome. The market is just as likely to simply become bound up within a relatively tight range.

How long might that last? Well, three years would not be unfeasible on the evidence. Such a period of marking time could have some interesting consequences. Perhaps the most striking would be to alter the fundamental perception of equity investment as being driven by capital growth and to refocus attention on dividends.

There are many reasons why this might be a good thing, not least scuppering the iniquitous practice of share buy-backs, which often bring little benefit to ordinary shareholders while lining the pockets of executives cashing in by exercising lucrative share option deals. The dividend used to be the key measure of investment return, but that idea has become somewhat lost in the mists of time and fog of greed. Capital gains were the icing on the cake. In a low-inflation environment, this may prove to be the way forward.

On Friday trading will commence in shares of Itnet, an outsourcing supplier of IT and business process services. For the year to 31 December the group had operating profits of pounds 5.9m (pounds 4.9m in 1996) on sales of pounds 81.7m (pounds 68.7m). The business is valued at pounds 246.1m on the placing price of 350p a share. It is too soon to say where they will start trading, but with an impressive growth record it could be a company to watch.

A note lands on my desk from Salomon Smith Barney extolling the virtues of euroland. The essence of the argument is that European Monetary Union will lead to an enormous single market for equities. From a combined value of $3,600bn (pounds 2,250bn) today the market will be worth $7,500bn in 2005. The firm picks some shares that are likely to be winners and losers from the emergence of a single equity market. Among the winners, only Bank of Ireland represents a London-traded entity, while Diageo is pinpointed as a potential loser.

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