Derek Pain: Keeping faith with Avation despite hiccup

No Pain, No Gain
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The Independent Online

Some terrible blunders have occurred since the no pain, no gain portfolio first appeared 14 years ago. Although I am a long-term investor, I have on occasions displayed unjustifiable impatience when ditching some stocks. For example, Anglo Pacific, a mining investor, was acquired at 16p and sold at 15p. I watched in astonishment as the shares soared to 340p last year. Mears, the support services group, was dumped at 84p and then went on to hit 385p. S&U was another unfortunate; sold at a nice profit but a long way short of the 975p peak at which the doorstep lender now resides.

On the other side of the coin, the portfolio has suffered a number of busted flushes such as Pubs'n'Bars. The failed pub chain was one of the stocks I stuck with for too long. Still the portfolio is comfortably in profit, even without the benefit of any dividend income. If payouts had been included in my calculations, they would have made a significant contribution as quite a few high yielders, such as and the now-departed Scottish & Newcastle Breweries, featured over the years.

I suppose most investors are left regretting some decisions. Blunders must be an inevitable part of the investment game. The trick is to keep them to a minimum. Over 14 years, perhaps my record is not too bad although I feel it could – and should – be much more impressive.

My worry is that I could be on the verge of making yet another decision I will come to regret. I mentioned last week that Avation, the aircraft leasing group, was causing some concern. The share weakness is, no doubt, due to investors having to scale back their expectations. In the context of more subdued times the interim figures are undoubtedly encouraging. But the last full-year results were an acute disappointment. Against earlier hopes they would emerge at £7m or even £8m, they flew in at £5.2m, a fall from the previous year.

This week's interim pre-tax profits emerged higher – nearly £4m against £3.2m. Net profits are put at £2.9m, up 38.7 per cent. Other figures include revenue 26 per cent higher with earnings per share calculated at 6.44p, a gain of 21.7 per cent. Avation now has 19 aircraft on its books, many leased to the Australian Regional Airline Alliance (SkyWest and Virgin Australia), and another nine are planned for delivery this year and next. Jeff Chatfield, Avation's chairman, says the alliance provides a "solid operating platform".

Early reaction to the interim announcement was not particularly favourable, with the shares inching lower. Still, stockbroker WH Ireland was sufficiently impressed to lift its target price to 140p and indicate that the group was back on a higher flight path, forecasting year's pre-tax profits of £7.2m and £8.9m next. Sell or hold? That was my problem. I have, after Ireland's confidence, decided to stay on board as, after a hiccup, Avation seems on its way. Time will tell.

The merger between SkyWest and Virgin opens up interesting possibilities. Essential regulatory obstacles have been overcome, and it is just a question of dotting the i's and crossing the t's. I cannot help wondering about Avation's future role. The merged group may be content to continue with a trading relationship, although it will no doubt ponder the advisability of bringing the ultimate owner of many of its aircraft in house.

Brightside, one of my more recent constituents, seems undervalued although the shares, in quite strong trading, have made recent progress. Researcher Edison estimates that last year's pre-tax profits, to be announced in early April, should emerge at £21.4m, up from £16.5m. The current year's, it suggests, should record a much more modest advance at £21.7m. The group recently joined the dividend list with a maiden interim payment and is likely to produce a 0.44p a share payment for the year.

The insurance broker and financial group was recruited at 18.5p last summer. The price is around 24p. Edison reckons it should be much nearer 34p.

Many shareholders are convinced the stock market has got it wrong and their investments are worth more than their quote. Edison make a strong case for a Brightside uplift but will the stock market be receptive?

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