Fleas have the jump on elephants

Jim Slater
Thursday 15 April 1993 00:02 BST

I ONCE compared a very large company to an elephant and made the comment, 'elephants don't gallop'. To double the earnings of a pounds 10bn company takes years of hard work. To double a very small company is a much easier task.

I have searched for an analogy for shells to contrast with my elephant. The best suggestion I can offer so far is a flea that can jump over 200 times its own height - equivalent to a man jumping over St Paul's Cathedral.

If you choose the right shell, you can make many times your money, but there is also a far greater operational risk and therefore a higher failure rate. To minimise the downside, great emphasis should be placed on the calibre of the chief executive and the quality of institutional backing.

I would be hesitant to recommend most shells, but one that does appeal is Ingham. The new chief executive is Nicholas McMahon Turner, who built up Parkdale during its successful earlier years. He left the company in 1987 because he rightly opposed its move into leisure activities. Since then he has built up a small property company, which was reversed into Ingham early last year. I have met Mr McMahon Turner and found him straightforward, able and very determined to build Ingham into a powerful company.

Touche Remnant has been a particularly firm supporter of Mr McMahon Turner, and other main shareholders include Bankers Trust, Throgmorton Trust and Barings.

My two main criteria, first-class management and excellent institutional backing, are therefore in place.

It may seem odd to you that I look to satisfy these two criteria before considering the nature of the business. My view is that the right management, with high-powered institutional backing, could be in almost any line of business - even building up a chain of fish and chip shops. Wassall, for example, has done an excellent job in reorganising and managing its diverse businesses, ranging from bottle tops, luggage and office furniture to do-it-yourself in America.

Mr McMahon Turner, who is 51, joined Ingham in February 1992. A property company, Eborgate, in which he had a substantial interest, was acquired by Ingham for 1.2 million shares and there was a pounds 3m rights issue. Since then the company has acquired Transtar International Group, a private company specialising in the wholesaling and retailing of spare parts for British classic sports cars, in particular MG, Triumph, Jaguar and Mini. Last year, Ingham acquired Moss Europe, which is in the same business, also specialising in MG and Triumph. Ingham will now control 55 per cent of the MG market and 40 per cent of Triumph, with obvious scope for major economies and improvement in prices.

The property arm, Eborgate, has a portfolio of properties in the north of England, yielding about 11.5 per cent per annum with good covenants like WH Smith and Legal & General. Rental income exceeds debt and there should be further profits from the sale of options on housebuilding land. There is also a wool business that has returned to profitability and will probably be sold at the appropriate time.

The balance sheet is being strengthened by a pounds 4m rights issue, which is underwritten. My pension scheme bought some shares last year, and will be taking up its entitlement. As a result of the new funds, gearing is a comfortable 10 per cent, giving plenty of scope for further acquisitions.

The main source of future profit at the moment is the classic car parts business, and for the year ending March 1994, pre-tax profits for the group are estimated by Peel Hunt at pounds 3m. On the increased capital, weighted EPS should be 14.6p, which, at the present price of 109p, gives a highly attractive prospective p/e ratio of about 7.5 and an anticipated above-average dividend yield of 7 per cent.

Ingham is capitalised after the rights issue at only pounds 18m, so this flea could jump a lot higher. There is a reasonable float of shares, but the market can be narrow at times. If you want to buy any, do not chase them. Wait for a while and buy if and when the price is near the present level.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. He has agreed not to deal in a share within six weeks before and after any mention in this column.

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