Security firm is worth monitoring

Smaller companies

SECURITY services minnow Orbis, at 41p, marries three themes - security, technology and revitalised management - as a likely contender for stock market success.

The group quadrupled profits to pounds 818,000 in the first half of the year and the share price, analysts believe, is now firmly underpinned by the medium term outlook. Added spice, though, comes from the prospect of more earnings-enhancing acquisitions following two deals which have already transformed the business.

It has been a long, hard haul winning market support. Chief executive, Trevor Brentnall, has shown his mettle by returning Orbis to profitability since his recruitment in 1994.

Investors were initially cautious because of his background at beleaguered handbags and hosiery group Hartstone, where he ran its profitable US leather goods arm. Hartstone ran into the buffers after a blitzkrieg of acquisitions.

But second-time-around, businessmen can learn from their experiences. Mr Brentnall has put in a textbook performance since relaunching his career at Orbis. Then called Hilclare, the group was loss-making and capitalised at just pounds 1m when he arrived, against pounds 20.6m now.

Since then, he has revamped the existing operation, by selling two loss- making subsidiaries for pounds 1.1m in cash, recouping Orbis's initial market worth.

More important have been the acquisitions which have brought vigorous new businesses and talented management, with chunky personal share stakes, into the group. First, in June 1994, Orbis bought First Security, a guarding operation with blue chip clients. In the six months to end September 1995, First Security's profits increased by 12 per cent to pounds 580,000 on sales up 15 per cent to pounds 6.1m.

The latest jewel in Orbis's crown, which lifted first-half profits way ahead of expectations, was the acquisition last June of Galequest, a closed circuit TV surveillance company trading as Sight & Sound Video Systems. Purchased for a net pounds 7.4m in cash and shares, Galequest added operating profits of pounds 512,000, up 43 per cent on the previous half year, with sales up 35 per cent at pounds 2.3m. The new division provides total security system solutions for customers. These include Southern Electric, the Ministry of Defence, Tesco, HM Customs & Excise, and a mystery firm Orbis coyly describes as "the leading UK telecommunications company". BT perhaps?

Management, principally the vendors of First Security and Galequest, now own around 40 per cent of the group. One arguable worry is Orbis's net asset deficit of pounds 3.4m as a result of writing off pounds 7.3m of goodwill on the Galequest deal. Within this, borrowings amount to pounds 5.6m including a term loan of pounds 4.5m.

But from a shareholders' point of view, debt-financed growth when interest rates are low may carry risks, but translates into faster growth in earnings per share for any given profit increase.

Mr Brentnall points out that full-year interest costs should be covered six times by earnings and that both the businesses are good cash generators.

Analysts are forecasting profits for the year to 31 March 1996 of pounds 1.9m, against the pounds 198,000 reported for 1994-95, followed by pounds 2.3m for 1996- 97. On those numbers earnings per share would be 2.5p and then 3p, leaving the forecast p/e ratio at 16 and then 13.3 times. That looks relatively undemanding and the shares should be able to move steadily higher even without further earnings enhancing deals.

If Orbis rates as moderate to high risk, Alternative Investment Market quoted Dean Corporation, the vehicle for the comeback of Stephen Dean, is somewhere out among the white-knuckle rides. At 12p the property services group is capitalised at close to pounds 4m after gaining a cash injection from Dean himself and having spent some pounds 1m on acquisitions in the building maintenance and service sectors.

A document by the company carries projections of profits moving from pounds 66,000 for 1994 to pounds 199,000, pounds 560,000 and pounds 770,000 for 1995, 1996 and 1997. The implied earnings per share are nil, 0.82p, 1.27p and 1.75p respectively. A further deal could take the latter two numbers to 1.6p and over 2p respectively with the p/e ratio falling to six.

The shares are tightly held and hard to buy. If anything goes wrong, they could prove impossible to sell.

But Dean is a man who won't let the grass grow under his feet and he has a useful sponsor in stockbroker Henry Cooke Lumsden. They could be fun.