Derek Pain: Grape expectations for English Wines Group
No Pain, No Gain
Saturday 02 May 2009
Patience, bundles of it, is often a necessity in the investment game. There is always a danger that a long-term involvement can stretch to such a distant horizon that there is a strong temptation to cut and run.
But such a defeatist attitude has little to commend it, providing, that is, that the company involved retains the ability to deliver – if rather later than originally expected.
English Wines Group, the No Pain, No Gain portfolio's only Plus representative, is an example. Its latest set of profits are, quite frankly, disappointing. But the company, the only British wine producer with a public share presence, is continuing to make headway. And with appreciation of English-produced grape wines (as opposed to fruit wines) growing there is every chance that EWG's shares will eventually mature into a rewarding investment.
The portfolio descended on them more than two years ago at 20p a time. They fermented happily to 26p but were then caught in the small-cap retreat and now reside, rather forlornly, at 14.5p. Pre-tax profits have emerged at £106,000 against £158,000. Two fairly unresponsive summers have taken their toll. So, I suspect, have various recessionary influences. Consequently the group suffered a 6 per cent turnover decline. To some extent the fall was off-set by higher prices. As chairman Paul Brett observed, the trading pattern was "unfortunate at a time of increasing demand" for EWG's highly regarded Chapel Down wines.
Still, positive signs abound. More and more land is being switched to viniculture and various aspects of production have been improved. An up-market restaurant at EWG's vineyard in Tenterden, Kent, seems to be doing well and an impressive range of leading restaurants and stores stock Chapel Down wines. A first-ever shipment recently went to Hong Kong.
I think it is also significant that directors account for some 70 per cent of the capital. Indeed, they have added to their stakes in the past year. Nigel Wray, the serial investor, is a major shareholder.
It is clear that EWG is taking rather longer to blossom than I anticipated. But I intend to be patient. Internet tipster Tom Winnifrith reckons revenue could double in a few years and is looking for operating profits of some £1.2m in 2011.
The group's figures offer another example of the twisted impact of the new-fangled accountancy rules. Because of share options the profits I have mentioned are well over the top. After accommodating these non-cash items the declared profit is reduced to £35,000 and the previous year's figure to £86,000. Yet another example of the bizarre accounting requirements now in force.
EWG is the third Plus share recruited to the portfolio. Printing.com, which graduated to AIM, is showing a small gain but Myhome International is best forgotten. In a bid to enlist more constituents I have looked at a number of Plus shares and I would not be surprised if EWG's isolation is eventually ended.
From a speculative miniature to the portfolio's biggest constituent – the hospitality giant Whitbread. The year's "true" profits came in at £199m, up from £135m. There must be concern over the continuing softening of trading at the Premier Inn chain, largely the result of more upmarket hotels cutting their charges. But the other two legs of the group, the restaurants division and the Costa Coffee chain, are trading "positively" and could largely offset any Premier setback. City profit forecasts for the current year are around £181m.
Another constituent, Mears, the social housing and domiciliary care group, has produced an encouraging update. Chairman Bob Holt says trading remains strong. In the past two months contracts worth £100m have been signed and forward orders stand at £1.6bn. Some 92 per cent of this year's expected revenue is now in the bag. With its customer base largely composed of local authorities and other public bodies, Holt believes the group is "substantially immune to bad debts".
Both Whitbread and Mears are, unhappily, below my buying prices. I cannot, however, see any point in selling at this stage. Indeed, as the stock market recovers I would expect them to narrow the gap. They are well-run companies with the ability and resources to counter the recession and have much to commend them to the buy-and-hold investor.
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