Star performers waiting in the wings

SHARES

LOW inflation should mean higher p/e ratios for fast-growing companies relative to the stock market average. But so far this has not happened to any marked extent. Indeed, the range between high and low p/es across the market has tended to narrow. Nevertheless, analysts say investor attention is likely to focus increasingly on a more select range of star performers.

Five companies that have already done well but have the potential to become substantial businesses by the end of the century are Regent Inns at 837p, Stagecoach Holdings at 397p, Huntleigh Technology at 843p, Perpetual at 2,150p and Psion at 905p. All, bar Stagecoach, are candidates for scrip issues, share splits that tend to boost the price by making each individual share more affordable.

Regent Inns recently reported a dramatic 77 per cent increase in earnings per share for the six months to 31 December 1995 and said trading conditions were "set to remain strong". The group's strategy is to build a chain of well-located, decent-sized pub/bars that generate a buzz of excitement while being comfortable places for families.

Growth is on a very fast track indeed, even if the latest figures owed a little to last year's vintage summer. The group floated in 1993 with more than 30 outlets. But underperformers were quickly sold, leaving a core of 18 - which may grow to 80 by the end of this year.

On a prospective p/e of around 25 the shares look dear against the market but they are cheap against the prospects.

Stagecoach has attracted controversy because of its aggressive approach to competition. Analysts argue that this is justified since it needs to signal clearly to rivals that its routes, its main assets, will be protected.

Where the group scores is in driving down costs by efficiency and a heavy programme of investment in new buses. Its finance director, Derek Scott, claims that the group has a 20 per cent cost advantage over rivals.

Enthusiasm was stimulated recently by the group's move into rail, which promises a rerun of its bus success and scope for stimulating passenger traffic by integrating services.

Annual turnover is now running at well over double the pounds 338m reported for 1995, which should underpin strong future profits growth. Analysts are looking for earnings per share of 20.5p for 1995-96, rising to 26p and 36p over the next two years, by which time the shares could easily have doubled.

Huntleigh Technology is a medical products business that has increased profits more than six-fold since 1990. Analysts are forecasting profits growing from 1994's pounds 9.8m to pounds 12.5m or more for 1995 and pounds 15m for the current year. On that basis the prospective p/e drops into the low 20s for a well-run business.

The group also recently announced an acquisition by its US joint venture company, MEDIC/HNE, which it expects to have a beneficial impact on 1996 earnings per share. The 50:50 owned joint venture is paying $6.65m (pounds 4.32m) to buy a potential rental stream of $10m to $12m a year. This will be flowing through an 80-branch network, which last year clocked up less than $1m of sales.

Perpetual is the hugely successful fund management business based in Henley. A bullish note recently published by a BZW analyst, Philip Gibbs, points out that since 1990 funds under management have grown from pounds 420m to an estimated pounds 5.4bn without taking into account the substantial amounts likely to be raised from its new Income and Growth Investment Trust. Mr Gibbs projects funds under management rising to an average pounds 6.9bn for 1996-97. On earnings per share projected at 121p for 1996 and 145p the following year the p/e falls into the mid-teens, which begins to look too low for such a reliable performer.

Last is Psion, best known for its Series 3a range of palmtop computers. The group has been on a spectacular roll with profits growing from pounds 1.4m in 1992 to pounds 6.6m in 1994. More than pounds 11m is expected for 1995, when the group reports on 19 March, and a further leap to pounds 15m is likely for 1996. That could put the group on a prospective p/e of 20 or less.

Investors worry either that palmtop computers are a passing fad or that Psion will be blown away by a much bigger competitor. But the signs are that hand-held computers are going to be a fast-growing segment for years to come and Psion is the world number two, behind Sharp. The group is now mounting an assault on the US market, so the shares could move dramatically higher yet.