Derek Pain: Disappointed and dismayed by setbacks

No Pain, No Gain
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The Independent Online

I am dismayed by the performance of G4S. The no pain, no gain portfolio recruited the world's biggest security group nearly three years ago. Since then the shares have suffered a trio of embarrassing setbacks.

When the portfolio descended on the stock it was apparent that security was becoming increasingly important in this uncertain world. There was, therefore, every chance that with manual guarding and the sort of sophisticated equipment that has become increasingly available there was every chance of a very profitable investment.

But G4S has let the side down. The first two share retreats were self-inflicted. And it is difficult to avoid the impression that the group cannot completely avoid some blame for the third – and latest – reverse.

The shares were doing well until the first calamity caused a collapse. An abortive £5.5bn takeover bid for ISS, a Danish-based catering and security group, did the damage. G4S was forced to abandon the ambitious acquisition because its own shareholders created such a fuss. Then came last year's Olympic fiasco, when the group failed to provide enough security personnel. So servicemen had to be called in to provide the necessary cover.

G4S has now added to the catalogue of woe by proffering a profits warning. Once again the shares have slumped. As I write they had crashed to 248p, but then moved to 256p. Before the latest onslaught the price was above 300p.

First-quarter profit margins have fallen 0.6 per cent, due to various influences. There does not seem much hope of a recovery in the current year. The question I am now confronted with is: does the group deserve to remain in the portfolio? After all, most leading shares have been in splendid form this year, yet the portfolio is out-of-pocket as it paid 264p a time.

Although many shareholders have obviously been dispirited by the profits warning, some City analysts seem prepared to stick with the shares. The investment house Canaccord Genuity is one. It is holding on to its buy recommendation, although cutting its target price to 300p from 325p.

G4S's role in emerging markets is one factor behind the analytical support from some quarters, but its role in the more developed world is often under pressure. More will be revealed next month, when G4S's management is due to meet City analysts and fund managers.

The price recovered from the first two disasters. Perhaps it will again, reinforcing the shares' "Indian rubber" tendency.

Another share causing anxiety is Avation, the aircraft leaser. It has unveiled a cash-raising exercise, selling new shares at 60p. Shareholders are being offered 0.0975 of a share for each one held. They can, if they wish, apply for extra shares should any become available. The offer, which is underwritten, will produce £2.5m. First reaction was to knock the shares down some 12p to 64p; they are now 66p.

I am surprised the group opted for an equity exercise. I was under the impression that the group was going to use debt to complete its scheduled aircraft deliveries to Virgin Australia. But although borrowings are part of the programme, it seems an equity contribution is required.

The portfolio cannot indulge. Under its rules of engagement investments must be restricted to £5,000. It is also worth repeating that dividends and dealing costs are excluded from my profit calculations.

Avation has been a disappointment. The shares arrived at 83.5p and I watched them fly to 120p. But a few developments have impacted on sentiment. The cash call has merely compounded what is clearly stock market disillusionment.

Still, Avation seems to be making progress. The stockbroker WH Ireland has forecast current year's profits of £7.2m, a sharp increase on the previous year.

Although the portfolio has more winners than losers and remains in profit, I am becoming increasingly disenchanted with my contingent of losers. G4S, Avation as well as Northern Petroleum are recent additions to the in-the-red brigade.

I feel sell action is needed. And I intend to be quite ruthless when it comes to adjusting the portfolio in the near future. I am a long-term investor and believe frequent and hasty share dumping is often regretted and merely enriches the stockbroking and market-making community. Shares do suffer bouts of depression from which they eventually recover.

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