Tiddler promises to be prize catch

As I have mentioned in previous articles, I like to invest in companies that offer goods or services of the future - 'new economy' companies such as Amersham International, Sage and this week's recommendation, the data storage group British Data Management.

On 5 March, British Data Management, which was floated just before the election last year, announced its interim results for the half-year ended 31 December 1992. Earnings per share were up 25 per cent, helped by a lower tax charge and two bolt-on acquisitions. There was a maiden interim dividend of 1.5p.

Three days later, the company placed 1 million shares at 202p to help fund the acquisition of a long leasehold property in London occupying more than 150,000 sq ft, of which 55,000 sq ft are rented by BDM. The property cost pounds 5.125m and the balance of over pounds 3m is being financed by a five-year bank facility. This is an excellent deal for BDM, which was paying rent of pounds 215,000 per annum and will in future receive rents from other tenants of a further pounds 416,000 per annum.

As a result of the purchase and the share placing, in a full year eps will be increased by more than 1p a share. Future expansion should come from building on adjacent land as required and taking over expiring leases from other tenants.

At the present price of 223p I believe the BDM shares are an attractive buy. The brokers' consensus estimate of eps for the year ending 30 June 1993 is 13.6p. In the coming year, I estimate that pre-tax profits should grow by about 20 per cent, although this will not be fully reflected in eps growth because the present low tax charge will revert to a near- normal rate.

On a prospective price/earnings ratio of 15 for 1993/4, the p/e growth factor (the prospective p/e ratio divided by the growth rate) is a very attractive 0.75, compared with the March average of 1.2 for leading growth shares.

It is hard to find companies with so little debt, that look like growing at well above the average rate and are still on relatively attractive p/e ratios. BDM fulfils my criteria to a nicety.

BDM is to be found under Business Services. Its main competitor is Hays, which has a market capitalisation of well over pounds 900m, a higher p/e ratio, less dynamic growth prospects and gearing of 32 per cent.

The whale is undoubtedly more solid and safe, but I much prefer the minnow.

As an added bonus, with a smaller company like BDM there is, of course, always a better prospect of a takeover. BDM would make a very tasty mouthful for Hays or another acquisitive company with a relatively high p/e ratio.

The company's future growth should come from increased demand for its services. I have noticed a growing number of its vans scurrying around London. In addition to the new premises in E14, it has also just leased extra premises in Aberdeen, where energy business is quite buoyant. Its largest customer, BP, is contracting out most of its non-core business and BDM has landed two substantial five-year contracts.

BDM is also bidding for pounds 5m worth of government contracts under the current test-marketing of farming out public sector operations.

Another source of future earnings growth is bolt-on acquisitions like the two announced in the first half. The company buys storage contracts from competitors and then cuts the overheads and absorbs the business into its own facilities.

Stephen Crown, the 48-year-old chairman and chief executive of BDM, is ambitious. He seems to be making excellent progress so far with organic growth supplemented by astute acquisitions. I believe that the company will prove to be a very rewarding long-term investment.

The author is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks before and after any mention in this column.