Derek Pain: Fresh thinking provides a greater Clarity

No Pain, No Gain

Clarity Commerce Solutions, the most recent addition to the no pain, no gain portfolio, is clearly on the comeback trail. Hopes that new managers were turning round the fortunes of this little high-tech player prompted its recruitment in April.

At first I looked a little foolish as the shares initially gave ground. But the year's figures confirm that the bad, old days are behind the group and, all being well, shareholders should be able to look forward to increasingly prosperous times.

Profits for the 12 months ending March emerged at £1.1m, which were slightly better than expected – in the previous year it lost £7.1m. Chief executive Ken Smith says the group is "well placed" for the current year which should produce profits of £1.8m, suggest Robert Sanders and Oliver Cummings, analysts at stockbroker Arbuthnot. Indeed they feel confident enough to predict that in 2012 Clarity could achieve £3.6m.

I am not a great believer in long-range forecasts as too much can happen to render them meaningless. Nevertheless, the fact that Sanders and Cummings are prepared to put their names to such a bullish estimate is an indication that Smith and his Clarity cohorts have achieved an impressive reputation in a short time.

Clarity offers a range of commercial software, such as point-of-sales and loyalty tracking programmes. Its activities are largely directed towards the entertainment, hospitality, leisure and retailing sectors. The roll call of 7,000 clients embraces 1,200 cinemas, 1,500 pubs and 640 leisure centres spread over 20 countries.

Many of its customers are in the discretionary spend category and are obviously far from immune to recessionary influences. It could be argued that such operations would cut back on their software. But the need to reduce costs and develop business in these straitened times is a plus for Clarity, capitalised at only £7.8m.

Its interim figures were either just in the black – or red. Under today's daft accountancy rules, it was a case of "take your pick". The second six months were clearly highly rewarding. After special charges such as amortisation, year's pre-tax profits were £471,000 compared to a £9m loss.

The shares are now 33.5p against 29.5p when the portfolio arrived. That is only a modest gain, but Clarity looks a splendid lockaway.

I am less bullish about Private & Commercial Finance (PCF), another constituent. The shares bump along at 11.5p against the 19.5p the portfolio lashed out some 30 months ago. Profit prospects are not exciting.

Since the shares were recruited, we have endured the stock market crash and the horrendous problems that have engulfed various sections of the finance industry. As a provider of hire purchase facilities for small and medium sized businesses and individual car buyers, the group could not escape the bloodbath.

Still, PCF increased turnover 22 per cent to £62.2m, yet pre-tax profits were £263,000, down from £934,000. Some of the decline is due to our mad accountancy rules, introduced largely because of the Enron disaster in the United States. They forced the company to strip £427,000 from its profit calculations. No cash was involved, it was the impact of valuing marked to market interest rate hedges. Next year a similar non-cash amount could return to inflate the pre-tax level.

Chairman Michael Cumming says interest rate derivatives protect the group's borrowing position and "we have no intention of crystallising these losses as the derivatives form part of our long-term hedging strategy".

Analysts Justin Bates and Tom Mills at stockbroker Daniel Stewart expect profits this year to be flat at around £200,000 before returning to the £900,000 level.

The group is currently attempting to raise £2.2m to replace convertible loan notes that expire soon. It is offering new notes, which carry a 10 per cent interest rate – a staggering return in these low-interest days. The recession has forced some of its competitors to discontinue their operations, allowing PCF to improve margins and be more selective, which must help combat higher costs.

PCF would have to trim its activities if it falls short of its £2.2m target. Still the sale should succeed, and the loan notes represent a small part of its funding that is largely provided by high street banks. They have re-pledged approaching £140m – but, not surprisingly, PCF is having to pay more for its cash.

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