Derek Pain: is riding out the recession in style

No Pain, No Gain
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The Independent Online

In these days of exceptionally low interest rates, the shares of Printing. com must look enticingly attractive to any income-seeking investor.

They offer a yield of more than 8 per cent, the sort of return once associated with high-risk enterprises. But the company is riding out the recessionary storms in style and although profits are under some pressure there appears to be every chance it will live up to the more optimistic dividend expectations.

Indeed, Jon Lienard, an analyst at stockbroker Brewin Dolphin, believes the group "will remain profitable and cash generative" and emerge from these difficult times in far better shape than its rivals. Of course, the yield means nothing if the dividend disappears; or is cut. But has helped allay any fears on this front by maintaining its interim payout at 1.05p a share. My guess is that the year's total will be unchanged.

There is, however, little chance that last time's special dividend, which at one time had the shares offering a staggering 16 per cent, will be repeated. Still, has always been a highly dividend-conscious business and it would not surprise me if it still nurses hopes of a modest distribution surprise.

It is a veteran of the No Pain, No Gain portfolio. The shares were recruited at 30.5p more than five years ago when they were traded on the fringe Plus market, then called Ofex. Now, on AIM, they are around 38p, although in those balmy days of a few years ago the price touched 75p. Capitalisation is nearly £17m.

The creation of chief executive Tony Rafferty, who speaks for some 20 per cent of the capital, the company is, in a sense, a high-street, hi-tech printer. The retail spread is around 290-strong – ranging from company-owned and franchised shops to what are called bolt-ons, normally small businesses, operating in such fields as graphic design and computing. Perhaps surprisingly, the group is still managing to expand its estate.

Unlike its rivals, its outlets do not perform any printing. Orders are transmitted to a Manchester plant which sends the finished product to the ordering outlet. Its main customers, seeking such items as letterheads, leaflets and posters, are individuals and small and medium-sized companies.

With margins under pressure, half-year profits fell from just over £1m to £870,000. So yearly profit forecasts have been sliced to around £1.85m. Last year's figure emerged at nearly £2.2m.

Despite its generous dividend policy and continuing expansion, Printing. com has yet to indulge in a significant cash-raising operation. The total number of shares in issue has expanded by some 1.6 million since its flotation. The exercise of options is largely responsible for the increase which would have been a little greater if the company had not purchased some shares in the stock market.

I believe many small-caps have the wrong approach to issuing new shares through placings to raise cash. I am not suggesting new funds are not required. But, too often, loyal shareholders are left out in the cold, forced to suffer dilution. And a placing often puts shares of the issuing company under pressure.

Shareholders of Clarity Commerce Solutions are the latest to feel the pinch. It raised £2.7m through a placing and although many of the shares went into firm hands, including directors and venture capital funds, the stock did not take kindly to the issue .

Just before the placing was announced, the shares topped 50p. But the cash-raising exercise, fixed at 40p, sent the shares tumbling to around 33p, They have since recovered to 38p, helped by expectations that next week's results will be encouraging.

The trouble is that only a privileged few enjoy a placing. Most shareholders are left as mere onlookers. A placing sends out the wrong message. It gives many shareholders the impression they are part of a second-class contingent as they are denied the opportunity to buy shares at below the then ruling price.

It is not unusual for shares to sink as placing profits are snatched. And the threat of further sales keeps the pressure on. I suppose that with a relatively small amount of cash involved, Clarity was justified in avoiding a more costly rights issue. But I would have opted for an open offer.

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