Smaller Companies: Man at the top shows his faith in Comac

PHILIP SWINSTEAD certainly believes in his own abilities. He has just invested another pounds 1.5m in Comac, the agency for freelance computer consultants, by way of taking up some of his rights in the recent share issue.

That brings his total investment this year to more than pounds 2.25m and leaves him owning 8.2 per cent of the company.

'I happen to believe in the concept. You have to put your money behind it if you believe in it,' he said shortly after the scale of his investment was revealed last week.

After raising pounds 20.5m in the rights issue he can pay pounds 18.5m for Computer Search & Selection and forge the largest agency in the UK for freelance computer consultants. The rest of the proceeds will go towards financing two new legs of the business.

He bought his way into Comac and became chairman earlier this year with a pounds 750,000 investment which gave him 20 per cent. The four-for-one rights issue leaves him at the helm of a much larger group and signals his return to the world of computing services.

During the 1980s he built up SD-Scicon into one of the largest software systems companies in the country. But provisions over problem contracts sent the group into heavy losses and left it vulnerable. EDS of the US seized the opportunity and won a deeply hostile takeover bid.

Now, after two years in the wilderness, he hopes to repeat the successes of SD-Scicon in the 1989s at Comac in the Nineties. The plan is to build a computer services company with three divisions but using computer services as the keystone. The other two divisions will be a strategic information technology consultancy and a systems integrations consultancy.

Mr Swinstead believes that size is becoming vital in the information technology agency business. 'The information technology agency industry is identical to the software market in the late 1970s and early 1980s,' he said six weeks ago when the rights issue and acquisition of CSS were announced.

'It is fragmented, but now big companies want preferred suppliers and they want to be able to say: 'If we take 50 people from you this year what deal can you give us?' That will lead to the same restructuring as we had in the software market.'

The beauty of the business structure is that apart from a few key people the other two divisions can be staffed by self-employed computer consultants. In this way overheads remain very flexibIe.

The price paid for CSS worked out at an exit p/e ratio of 12.5 times, which was bound to mean that the deal would be earnings- enhancing for the higher-rated Comac.

When Comac's profit before interest and tax and costs are added together for the last reported periods of the calendar year 1992 and the year to March 1993 respectively, the aggregate is pounds 2.9m.

Assuming a 33 per cent tax rate, that gives historic earnings per share of 5.3p and a historic multiple for the new group of a little more than 19 at last week's closing price of 103p.

This seems expensive when compared with the electronics sector's average multiple of about 15 times. But few of Comac's peers are truly comparable and many are in mature business areas.

In addition, almost all of Comac's fixed cost base of about pounds 1.6m is being saved as a result of the acquisition of CSS. The latter's head office and business structure is simply being substituted for Cormac's.

Set against the background of what is generally perceived to be a reasonably buoyant information technology market, it seems that Comac should report substantial earnings growth for 1994.