Derek Pain: Composter is down in the dumps but vet firm has legs

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The Independent Online

It's about time I reinforced the no pain, no gain portfolio. I have decided to recruit two contrasting shares – one down in the dumps, the other riding relatively high. They are both small caps that, I hope, will not be too troubled by the recessionary climate and could, with a little luck, emerge as valuable constituents.

TEG, a composting technology specialist, is the share that has seen better days. Animalcare supplies veterinary products and by comparison enjoys a near glamour rating. Their arrival takes the portfolio's membership to 15, away from the number this superstitious old timer finds rather uncomfortable. TEG shares stand, as I write, at just 8p, capitalising the company at £9.4m, and Animalcare is 171p, putting a £36.1m value on the business.

In the jargon of the stock market, TEG is what is known as a "speculative buy" – in other words a bit of a gamble. The shares were once around 150p and have fallen from 35p or so in the past year. They endured a nasty summertime knock when the company surprised with a 10p placing and open offer, raising £3.8m. I have long campaigned about a privileged few enjoying private placings with most shareholders left out in the cold. At least TEG offered all shareholders the chance to get involved and its open offer was heavily oversubscribed.

Contract delays seem to have been a factor in its decision to raise capital. Still, the group's outlook appears positive and I am prepared to take the view that in the current atmosphere, with small caps completely out of favour, the shares are over-sold.

Pre-tax profits for the current year are unlikely, although it has achieved such a milestone in the past. At the interim stage the pre-tax loss was doubled at £798,000 but operating profits of £2.3m, up 5 per cent, were achieved. In September its cash kitty hovered near £3.3m.

TEG gets much of its revenue from turning waste – from gardens and kitchens to animal byproducts – into compost. Such an activity has obvious merits, with many local authorities under pressure over landfill sites. TEG has also ventured into energy output, with one installation going into production, although it will not reach full capacity until later next year. Various other developments are in the pipeline.

Animalcare is by quite a few degrees in a stronger position. Its last accounts recorded pre-tax profits up 21 per cent at £3m, with the year's dividend lifted from 3p a share to 4p. And, with new products launched and planned, the group seems set to continue to prosper from the nation's love of cats, dogs and other pets. I have read that in the present financial climate some owners can no longer afford to provide the necessary care. There have even been stories of pets being harmed to allow the collection of insurance. But I believe we are still a nation that is prepared to go to extraordinary lengths to lavish expensive attention on household animals.

From my own experience I have witnessed in recent months two members of my family indulging their love of pets, and, at the same time adding to the income of vets and their suppliers. In addition to regular and costly checks, one spent nearly £400 on nursing a dog back to health after a snake bite; the other's unexpected vet bill is approaching £1,000 (and repairs are not yet complete) on the removal of a growth from a dog.

Animalcare arrived on the stock market in 2008 and its shares have risen from a low point near 60p. They are now on a fairly fancy – but by no means exotic – rating. I usually seek what I regard as under-valued shares, but on this occasion I feel justified descending on the veterinary group.

I have also toyed with the idea of adding another blue chip to the portfolio. Such an addition would add a little ballast. Wm Morrison, the supermarket chain, and Lamprell, an oil services business, are among those I have examined. I regard 16 as the ideal number for a modest portfolio, and on that premise could add another constituent. Of course, 16 is not a magical number. It is merely indicative and I have strayed from its embrace many times.

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