Suppliers dial hot line to growth

Smaller Companies

INVESTORS might well worry when shares in a particular sector are strong, suspecting that what goes up must come down. But it is easy to be too cautious. One of the strongest sectors of the UK market at the moment is in supplying equipment to the telecommunications market, but there is more growth to come.

Investors might take a close look at the latest entrant, Vero, where dealings begin on Friday, 17 November, and it may be worth applying through your stockbroker (by 12 noon Thursday, 9 November) for shares in the intermediaries' offer. This is indicatively priced between 200p and 220p with final pricing to be announced this Friday. But with only pounds 4.5m or pounds 5m of shares available it may not be possible to secure a worthwhile piece of the action until dealings begin.

Vero has something in common with Rainford Group, where I also recommended buying shares in opening dealings. Rainford shares opened at around 300p when trading began in April and are currently 410p, having been as high as 449p. It makes enclosures for the base stations for mobile telephone networks, and has been growing at an almost exponential rate, with profits climbing from pounds 325,000 in 1992 to pounds 5.35m for the year ended 31 March.

The shares dipped recently, probably in sympathy with an even fiercer reaction at its biggest customer, Finnish mobile phones group Nokia, which struck a slightly cautious note with recent eight-months figures and saw its shares plummet. But there is no reason to believe the boom is over.

Vero's managing director, Brian Gay, cites projections by Ericsson and Nokia suggesting the number of mobile subscribers worldwide will rise from 80 million to 350 million by 2000 and 500 million by 2003. It took 15 years to reach 80 million, so putting in infrastructure to support over six times that number in eight years should mean plenty of work for suppliers.

Interim figures for Rainford later this month should bring good news. One analyst is forecasting full-year profits rising by 44 per cent to pounds 7.7m, dropping the price-earnings multiple to 20.7, with a further rise to pounds 8.9m forecast for 1996-97.

Vero is much less focused on the mobile telephone sector but has the advantage over Rainford of a far broader spread of customers. The company was a management buyout from the cables giant BICC last April for pounds 33m. Strong demand and substantial investment have pushed operating profits up from pounds 2.2m for calendar 1992 to a forecast pounds 12.6m for this year. Based on that and pro forma earnings per share of 12.5p, market capitalisation is likely to be around pounds l27m. Even so a historic p/e of 16.8, if the issue price is fixed at 210p, looks undemanding against Rainford.

Prospects should be good. Two- thirds of sales are overseas and the group has been building its international distribution network, creating plenty of scope for growth. More than 56 per cent of sales come from racks and enclosures for the mobile telephone, fixed-wire and networking markets, with the largest customer, Ericsson, taking 15 per cent of turnover, followed by Nokia with 3 per cent.

Margins have already improved from 4 to 13 per cent in three years, but could edge up further to 15 per cent in time. If turnover continues growing at the 20 per cent-plus rate seen in the latest year, it should create the headroom for the shares to perform strongly in 1996.

Another spectacular performer has been Telspec, which has come up to 1,045p from 403p when I recommended the shares in March. Since then the group has reported interim profits more than doubled and a pounds 24m order from southern Africa. Some observers think the order book could easily swell to pounds 100m or more, making forecasts of profits of pounds 14m and pounds 18m in 1996 and 1997 respectively, after the pounds 11m expected for this year, look conservative. The rating is super-high, but bold investors should hang on.

The same goes for Filtronic Comtek - another cellular base station specialist - at 495p, for a p/e over 80, against my latest recommendation price of 260p. That looks stupendous, and the shares dived recently from a peak 515p to under 370p when directors sold shares under a complex option scheme. But early next year will bring a huge increase in capacity in the US and UK. This is likely to be rapidly filled with extra work.