Shares in Aim-listed Fountains fell 14p yesterday after the environmental support services business reported a £2 million turnover shortfall in the first half due to foot-and-mouth. James Crux reports.

Recommended in May's Growth Company Investor as an undervalued play at 113.5p, Fountains (FNT) fell back to 126.5p on first-half figures to March. This values the Banbury-based business at just £13 million.

The interim figures showed pre-tax profits 8 per cent ahead at £477,000, but investors chose to focus on sales, which eased from £17.2 million to £16.2 million. This fall was expected by the management, which says sales were held back by 'the residual impact of foot-and-mouth'.

Chairman Barry Gamble claims the resumption of normal activity took until this spring. The final impact on sales was a shortfall of around £2 million. This came as no surprise to the market, as restrictions on countryside movement curtailed the company's work programme in the year to September, when it lost £4 million in revenue.

Fountains will not bring up foot-and-mouth again. 'It's foot-and-mouth, period,' roared Gamble.

Many business changes have also occurred. 'We've improved the business mix, with a further rise in the proportion of sales derived from utility services and grounds maintenance. And the Beaver Utility Services acquisition achieved good early trading from turnover of £641,000,' says Gamble.

Fountains acquired Beaver – the vegetation management and grounds maintenance play that works for electrical utilities in Wales and western England – in December and the integration of the business is progressing well.

Gamble claims the company's order book is stronger than at this time last year, although he refuses to provide a figure.

Meanwhile, the proportion of business from key customers continues to rise. As well as offering visibility of earnings, these longer term deals reduce bidding costs.

As noted in Growth Company Investor's May Company Watch, the group unveiled six new contracts worth £3.2 million at February's AGM. These were with a spread of clients including National Grid, Southern Water and Northern Ireland Electricity.

For the year to September, house broker Collins Stewart expects pre-tax profits of £1.3 million and earnings of 10.7p, with £1.6 million and 12.5p to follow in 2003. This means the shares are trading on an undemanding 12 times 2002 forecast earnings, falling to 10.28 next year.

With foot-and-mouth put to bed and operating margins improving as it shifts its business mix, Fountains still looks undervalued. Hold/Buy.