Shares to look out for in 1993: Independent City writers, who easily beat the market last year, select their new portfolio

THE PROMISE of our portfolio of a year ago has been fulfilled. It has comfortably beaten the rest of the market, rising in value by 25 per cent.

A year ago we thought recovery was on its way. But our selections did not depend on an upturn, which was just as well. For the most part, they were well managed and undervalued companies.

Siebe, the engineer with a large US exposure, did us proud, followed by T Cowie and Boxmore. KwikSave stumbled in the last day-and-a-half of trading amid scare stories about supermarket 'price wars', but still showed solid gains for the year. Three shares we recommended because they had fallen, fell even further, holding back the overall result.

This year we expect a slow recovery in the UK - as we did a year ago. We have included a number of well-managed companies in our selection, as well as a couple of recovery plays. We have increased the number of smaller companies. The portfolio includes companies with exposure to the US, where the economy is growing, but few with large interests in continental Europe, where it is shrinking.

Blue Circle

Investors have had their fingers burnt so often by believing the building industry was poised for recovery that there is a reluctance to invest - particularly if, like Blue Circle, they stand on more than 20 times likely 1993 earnings at 199p. But most forecasters expect the construction market to be showing signs of recovery by the end of this year. Blue Circle is at the lighter end and its cement, bathrooms and central heating boilers should be among the first to benefit.

More importantly, it is no longer sitting around waiting for the economy to get better but is cutting 15 per cent from its capacity. While the full benefits of that will not flow through until 1994, it should help to limit the effects of the recession on next year's profits.

Compass Group

The contract caterer has a clear strategy and a hitherto untapped market to attack, which is essential in a dull UK economy. Thwarted in its pounds 525m attempt to buy Forte's Gardner Merchant subsidiary, Compass has re-addressed itself to the pounds 6bn UK catering market, where only 15 per cent is contracted out compared with 25 per cent in the US.

Compass, armed with Travellers Fare, is spending up to pounds 2m on marketing its services to separately identified sectors in the private and public sectors. Prospects for hospital catering have been boosted by the arrival of management-oriented trusts. Progress may not be swift but, at 518p, the prospective multiple of 13.8 is at an unjustified discount to the rest of the market. Dividend cover of almost three times provides firm backing for a yield of 3.5 per cent.

Grand Metropolitan

This company has a large US business accounting for almost half last year's turnover. The food operations suffered from a glut of fresh vegetables last year but should recover in 1993.

After a disappointing performance last year, when they underperformed the stock market by almost 10 per cent, the shares at 465p are trading on just over 14 times prospective earnings, which looks modest given the company's strong prospects. These are built on a powerful collection of international brands and ability to pay a rising dividend.

Merrydown

Cider is growing in popularity among drinkers and the producers are becoming more attractive to investors. Taunton and HP Bulmer have benefited most to date while Merrydown has been overshadowed. It justifies a re-rating.

Merrydown has recently concluded two key profit-boosting deals, a draught cider arrangement with Gaymers, which has long- established links with the pub trade, and the purchase of the Shloer and PLJ adult soft drinks brands from SmithKline Beecham.

Analysts expect profits of pounds 1.9m for the year to March, and pounds 4.5m for 1993/94. Merrydown, at 255p, is trading on a multiple of nine times forecast earnings for 1993/94, compared with 15.2 for Bulmer and 17 for Taunton. The shares are also set for the traditional mark-up associated with moving from the USM to a full listing.

Tomkins

The attractions of Tomkins are twofold. First, it is the only big conglomerate to have a large acquisition to bed down this year following its pounds 935m takeover of Ranks Hovis McDougall. Second, it should start to reap the benefits of the nascent US recovery, which will account for half its business even after the RHM deal.

The shares have recovered much of the ground they lost immediately after the acquisition was announced, leaving them on an expensive-looking multiple of more than 19 times earnings at 256p for the year to April, based on analysts' forecasts of about pounds 170m pre-tax. But RHM will not dilute 1993 earnings, and thereafter there is the prospect of significant enhancement as Tomkins tackles RHM's pounds 1.4bn cost base and sorts out the over-capacity in the bread market.

Yule Catto

The efforts of another well-regarded and lean executive team (there are only two of them) appear to have been overlooked at Yule Catto. Despite a tough UK market - speciality chemicals supplying synthetic latex and paint emulsions - it has held its margins and is likely to benefit from devaluation.

Building products, about 30 per cent of 1992's probable pounds 22m pre- tax profits, have been a problem in the UK and the half of sales in Europe may be softening. But a p/e of 14 times 1992 earnings at 240p will fall in 1993 and strong cover underpins dividend growth and a 3.5 per cent yield.

WPP Group

Having completed a second refinancing in August, the financial future of Martin Sorrell's advertising giant, WPP Group, has been secured for the foreseeable future. The question is whether the fortunes of the group, which owns such great marketing services names as J Walter Thompson, Ogilvy & Mather and Hill & Knowlton, can recover.

The UK advertising market will be flat this year but, in the US, reflotation under President Clinton should stimulate growth in marketing. Even without a US recovery, profits are expected to be around pounds 30m this year. The share price of 47p represents a multiple of barely six times earnings, which gives a lot of potential for upside.

----------------------------------------------------------------- HOW WE DID LAST YEAR ----------------------------------------------------------------- Share Price(p) Price(p) % change 31/12/91 31/12/92 Boxmore 126* 199 58 BTR 399 550 38 T Cowie 99 156 58 Albert Fisher 72 55 -24 Fisons 326 245 -25 Forte 233 188 -19 KwikSave 578 773 34 Siebe 256* 440 72 Average 25 FTA All Share 1187.70 1358.06 14.3 ----------------------------------------------------------------- *Adjusted for issue -----------------------------------------------------------------

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