An eye-catcher on the shop floor

Smaller companies

Last year Princedale Group, the marketing services to plastics business, acquired a loss-making shopfitting business, The Sloane Group, for pounds 4.9m.

That deal is increasingly looking like a masterstroke. In the current year Sloane is expected to make profits of pounds l.8m out of likely group profits of pounds 4m. Good growth prospects mean that in the longer run Sloane could build itself into a business with a pounds 40m to pounds 50m turnover making profits of pounds 5m.

Progress on anything like that scale should lead to a rerating of Princedale's shares which, at 34.5p, are on a prospective p/e ratio of just around 8.5 times. Another quoted specialist shopfitting business, Havelock Europa, meanwhile, is on a prospective p/e of nearly 20. Admittedly Havelock has a solid record but the discrepancy does show what could happen.

Before the Sloane deal Princedale had looked like a company in search of a real sense of purpose. It was born out of the ashes of a briefly high-flying USM firm, Craton Lodge & Knight, which specialised in helping big consumer groups devise and launch new branded products. As CL&K, its shares touched 200p but had already collapsed from those heights when Stephen Bennett, an accountant, was brought in.

Reconstruction and a string of deals have had a beneficial impact on earnings per share and the balance sheet but left Princedale with what seemed a loosely related string of interests. Mr Bennett is the first to admit that there is no synergy between the divisions. However, he has proved to be an effective manager. Between 1990 and 1994, before the Sloane acquisition, sales grew from pounds 3m to pounds 43m, balance sheet gearing (borrowings as a percentage of shareholders' funds) fell from 235 per cent to zero and earnings per share rose steadily from -6.3p to 2.8p. However the shares have remained in a range between 20p and 40p and touched their lowest point last year. The likelihood is that will prove the darkest hour before the dawn because of Sloane, with its roll-call of leading retailer clients and turnover of pounds 19m. Shopfitting was an industry that boomed in the late 1980s and then busted in the early 1990s as the boom ended. Sloane, which was loss-making, clearly also had management problems and weaknesses in financial controls and operational systems. But Mr Bennett has moved rapidly to put it on a profitable footing.

Staff numbers were cut from 360 to 311 and the system of staff remuneration has been changed. The result has been to cut costs on an annual basis by pounds l.4m and lift the profit margin to 10 per cent.

The next stage is to build turnover. Alongside developing strategic partnerships with existing accounts such as Asda, Marks and Spencer, Tesco and Woolworths, the group has been winning important customers such as Body Shop, Dixons, Next, River Island and UK Lotteries. There have also been projects at the design stage for customers such as Blockbuster, Burton Group, Carpetright, Hasbro and Safeway.

The just-announced acquisition of the business and certain assets of another fitting specialist, Epsom Group, for pounds 300,000 give Princedale a foothold in the booming financial sector for which Epsom designs and manufactures display fixturing. Clients include NatWest, Midland and Lloyds Bank, Halifax Property Services, and the Co-operative Bank. Epsom has swung between a profit of pounds 109,000 on turnover of pounds 6.1m for the year to 31 March, 1995 to a loss of pounds 323,000 this year. It looks an ideal target for rationalisation with the additional advantage of fitting well with Sloane operations.

Investors climbing aboard now are buying into a growing company on a modest single-figure p/e with further progress likely next year. Profits should move ahead to at least pounds 4.7m.