Smaller Companies: Smart move stops the rot

It is a mystery why a little company can undergo a transformation to see it shake off its past, and years of sleepy under-achievement, and head off in an entirely new, potentially successful direction, writes Richard Phillips.

If it is a case of a new management arriving, then the shift is usually explicable. But sometimes it is the existing management which says, "Enough is enough", and calls for a complete change of attack.

Such is roughly what has happened at Torex Group (57.5p), which joined the old USM in 1989 at 62p. For much of its time as a listed investment, the Devon-based tool hire to catering contractor has been a feeble performer, but that may have changed.

In March last year, in what amounted to a reverse takeover, it paid pounds 4.3m to acquire Smart Terminals, a privately-owned company that specialised in electronic point of sales (Epos) software. It installed Chris Moore, owner of Smart Terminals, as Torex's new chief executive.

It was a clear sign that the group intended to reposition itself in the high-tech, high-growth services sector. While it has been a bold move, it is also, arguably, high-risk.

Torex has followed up with another three software acquisitions: BIT Group for pounds 3.5m in December, along with computer hardware and software distributor Warwick BePoS Group, for pounds 500,000, and Ambridge Business Systems, a medical systems software and systems provider, for pounds 1.75m. To help fund the deals, it raised pounds 1.93m in a placing and open offer at 43p.

The grand plan is to grow what Mr Moore dubs "vertically integrated" legs to the business. Smart Terminals, Warwick and BIT all sell Epos systems into the retail sector. Combined sales of the retail IT division should be some pounds 15m in the current year.

Ambridge, where pounds 3m sales are expected, will be the platform for expanding a medical leg.

The next niche Torex hopes to attack will be leisure centres. Its capabilities, from software design, to integration and hardware supply and support, will mean it can produce a system which can link, say, squash court bookings, to the upstairs bar, and how many pints of beer an individual customer orders.

In retail, there is still substantial growth potential, as customer needs become ever more sophisticated, with loyalty cards, credit and debit card systems, all needing new software.

In the longer term, the group will dispose of its old tool to toilet hire business, although there is no date fixed as yet.

The firm has also beefed up management, appointing Rob Loosemore, from Wace, as operations director, in charge of day-to-day affairs.

According to the house broker, profits this year can hit pounds 2.4m, rising to pounds 2.8m in 1998. That leaves the shares on a forward PE of just over 11 - cheap at the price.