Supply chain software business Chelford appears to be on a roll. Results for 2004, announced in April, were towards the top end of analysts’ expectations. Losses of £373,000 the previous year were turned into a profit of £282,000. Sales finished £2 million ahead at £11.9 million.

Then, at the company's annual meeting in early May, chairman William Birkett was able to say that progress had been maintained in 2005 with 'order intake ahead of last year and the new business pipeline strong'.

None of that has cut much ice with the stock market. Chelford’s shares have taken quite a battering – having come back by a quarter in the recent nervous market. But they now look exceptionally good value.

Chelford's emergence has been gradual. Initially brought to market as a cash shell by famed shellmeister Mike Edelson five years ago, the company moved into the supply chain business in August 2000, when it took over software business SSI in a reverse deal.

SSI still remains the group's key profit generator, though Chelford's reliance on it was subsequently diluted by the acquisition of Cleaves Solutions in December 2002. Cleaves was a key UK distributor for enterprise software giant SAP, with a focus on supplying wholesale and distribution solutions to the food and drink, consumer goods and chemicals/pharmaceuticals sectors. The net result is that Chelford today boasts two core divisions: SSI and SAP, which service broadly related markets.

The difference between these two businesses, as chief executive Trevor Lewis explains, is that the former 'sells to mid-market food and drink, chemicals and metals' manufacturers and producers, which 'though disparate, are linked by certain key aspects such as regulation'. SAP, on the other hand, typically targets the next stage of the supply chain; that is, 'wholesalers and distributors'.

What stands Chelford in good stead is that both divisions are growing rapidly at present – albeit in a relatively mature sector. The higher margin operation is SSI, as its Tropos software system is its own intellectual property. Last year it achieved a 22 per cent rise in operating profits on reduced turnover. SAP, meanwhile, grew sales by 95 per cent to £4.5 million and generated a profit for the first time.

For Chelford, the key to success is to get more out of its existing customer base. Lewis says the company expects around 85 per cent of annual revenues to stem from this source and notes that it started 2005 with nearly two-thirds of budgeted turnover already contracted.

A recent contract with AIM-listed cake manufacturer Inter Link Foods is fairly typical of the type of deal Chelford has been winning. Initially worth £350,000, the contract saw Inter Link acquire Tropos to plan a host of its key operations, including sales and procurement. Encouragingly, Lewis confides that 'Inter Link has said that if this year's roll-out goes well it will look to introduce the software into its new plants as well.'

With EU regulations on the traceability of raw materials recently highlighted by the Sudan 1 food colouring scare, systems enabling food manufacturers to track ingredients from purchase to use are becoming increasingly important. The trick, argues Lewis, is to understand that potential customers 'are seeking a solution and want to speak to people in similar sectors, who've overcome similar issues with your help'.

Chelford certainly seems to be doing well in this respect, with Cotton Traders, Fox Confectionery and Uniq among those buying its software last year. Lewis is now confident 'we don't need to acquire to have growth potential'.
That said, he admits that 'if we could find the right thing at the right price we'd go for it'. Certainly, the enterprise/resource/planning sector looks ripe for consolidation so it may be more a question of when rather than if the company either acquires or is itself acquired. Chelford's hand is strengthened by the fact it is debt free and has just over £2 million in the bank.

For 2005, broker Evolution Securities forecasts a profit in the region of £1.6 million on £12.7 million of sales. That puts the shares on a lowly prospective p/e of 10.2. Given that earnings look like growing by about a half this year on a normalised tax charge, that is a mean rating.