Smaller Companies: Cray has room for improvement with Dowty IT
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Your support makes all the difference.CRAY ELECTRONICS, the Berkshire-based high technology group, is in the early stages of turning around Dowty's old information technology business, Dowty IT, which it bought for pounds 50m last month.
The company is run by Sir Peter Michael, chairman, who took over more than two years ago, and has already increased pre-tax profits from pounds 1.33m in 1989 to pounds 4.8m this year. He has slashed gearing from more than 200 per cent to zero and sold off peripheral businesses to form a tightly focused technology business.
Now some analysts believe Sir Peter and his team can improve Dowty IT's fortunes so quickly that they will actually enhance earnings per share this year. Smith New Court, for example, is forecasting earnings per share of 3.5p compared with 3.2p and pre-tax profits of pounds 11.5m (pounds 4.79m). The following year's forecasts are 5.5p and pounds 18m respectively.
Cray bought Dowty's information technology business from TI with the proceeds of a rights issue. The pounds 39m one-for-two rights issue of 67.4 million new shares at 61p each just about covers the pounds 40m cash paid. The remaining pounds 10m will either be paid in cash or via a medium-term loan note.
The Dowty business's fortunes have been on a declining trend. Its operating profits have fallen from pounds 22.4m in 1990 to pounds 1.5m in 1992 while turnover has edged back from pounds 198.1m to pounds 176.2m.
Cray blames delays in the launch of new products as well as the recession. In addition, uncertainty over the division's future has not helped.
Sir Peter has said he will accelerate the launch of new products and introduce more effective management. Research and development will benefit from a merger with Craycom, Cray's datacommunications business.
A cursory examination of the acquisition's profits show there is ample scope for improvement. Dowty's datacommunications service business made a profit of pounds 10m last year on sales of pounds 34m. The rest of the business lost pounds 8m on sales of pounds 117m.
If, as seems likely, Cray's managers do improve performance of the new business their next task will be to increase earnings in the highly competitive datacommunications marketplace. There is no telling how successful they will be, but Sir Peter and his team have proved they can build up a successful technology business before.
Sir Peter and his fellow directors, Jeffrey Harrison and Jon Richards, bought a joint 5 per cent stake when they joined the company, which is an incentive to make the share price perform.
But on an expensive historic price/earnings ratio of 21 times and a prospective ratio of 19.5 times, there is not much room for disappointment. A purchase of these shares must be almost entirely based on faith in the management.
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