Heads you win with penny shares

SHARES SMALLER COPPANIES

RISK AND reward are opposite sides of the same coin as far as the market goes. Investors looking for above-average returns have to accept that if things go wrong they may stand to lose the lot. The shares I have selected here offer way above-average potential but are certainly not for widows and orphans.

First on the list is Media Business Group (MBG) at 4.5p. Its chairman, Allan Rich, would probably take exception to being put in such a "high- risk" category. The group, which is a specialist media buyer of advertising space, has been around for 20 years and is solidly profitable. But the company is small - two years ago profits only reached pounds 383,000 - and the recent flotation at a penny dreadful price of 3p by little-known stockbrokers leaves a certain air of vulnerability over the shares.

Against that are solid attractions. The group is one of the largest independent operators in one of the fastest-growing areas of the advertising industry. Billings this year could be around pounds 155m from an impressive client list, including the likes of Direct Line, Mercury, Polygram, Roche Consumer Healthcare, and Revlon. MBG uses its expertise and buying muscle to buy space cheaply and guide its clients through an increasingly complex maze of advertising outlets.

Industry growth is more than amply reflected in barnstorming results from MBG. Pre-tax profits have grown from pounds 383,000 for the 13 months to April 1993 to pounds 631,000 for 1994 and pounds 920,000 for this year. Interims due in January are likely to show the group on course for pounds l.2m or better for 1995-96. That would leave the forecast price-earnings multiple at 15 or less, cheap by comparison with its quoted rivals, CIA group and Aegis.

A warning, though: low- priced penny shares typically have wide buy-sell spreads, so investors should set a limit within the range when they deal.

Several notches more speculative, but offering excitement in equal measure, is IES Group at 835p. The company develops products based on proprietary hardware and software, mainly for the security industry. One drawback is that the shares are "quoted" only on the Offex matched bargain facility, so marketability is poor. London-based readers can find a price in the Evening Standard; otherwise ask your broker. The plan is to join the AIM market, probably early next year. Buyers now will qualify for a one-for- one bonus issue on 4 December.

Its chairman, Roy Ricks, who sold an earlier electronic security venture to BET, believes IES is poised for take-off in the next few months, with sales and profits likely to soar next year and 1997. There are three main product ranges. In hardware, it offers audio verification of burglar alarms and tagging systems for retail displays. The tagging or Asset Monitoring System (AMS) allows retailers to display items so that customers can touch but not take. Among big AMS customers so far is electrical group Dixons.

The second key business area is managing security for large retailers including Texas Homecare, House of Fraser and Somerfield. This provides high-quality recurring income and is growing dramatically.

Third, and possibly most exciting, is the group's range of digital imaging software. Triggered by movement, these systems provide a cost-effective way of capturing and storing images, with big security implications.

Of great potential, for example, is security at cashpoints.

Figures for the year to end-September are due shortly, but will not set the world on fire. But the current financial year should see more action. Conceivably sales could hit pounds 20m, up from pounds l.6m in 1993-94, with profits topping pounds 2m, perhaps by a substantial margin. Current market capitalisation is pounds 24m, and the shares have already risen 16-fold from 55p at the time of the first quotation in 1993.

My main criterion with penny shares is that something should be about to happen. Two where the action is are Black & Edgington at 8.5p and Platignum at 8p. The former is backed by two entrepreneurs, Nigel Wray and Ian Gowrie-Smith - the latter helped make Medeva, now capitalised at pounds 805m, a great success. There are hopes that he will do something similar with his new vehicle, with a deal believed to be imminent.

Black & Edgington is already capitalised at close to pounds 50m, though, so penny share aficionados may feel happier with Platignum. Asset value is perhaps pounds 4.5m to pounds 5m against a market capitalisation of pounds 6.5m, again with a significant deal expected shortly from a new management team led by Nick Smith, formerly president of Kimberly-Clark Europe.