Derek Pain: Relax – you can profit from this credit crunch

No Pain, No Gain
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The Independent Online

A ROOT and branch overhaul and a couple of well-targeted acquisitions can work wonders for a share – even when the stock market is deep in the doldrums. In November, Relax Group bumped along at a mere 19.5p. Nowadays, the price is around 66p.

In the meantime, the shares had hit 80p, with chairman Bernard Asher, a former top man at banking giant HSBC, actually paying 100p for a modest stake in February.

I have, in recent columns, discussed the performances of shares that have shrugged off the impact of the deepening recession that has already devastated the stock-market face of many well-run companies.

Like other survivors, Relax has seen better days. In a former incarnation, when it was known as, the price was comfortably above 200p.

In the 12 months ended July, pre-tax profits were a mere £14,000. A year earlier, when the shares were riding high, the group achieved £3.4m. Asher is happy to dwell on the EBITDA (earnings before interest, tax, depreciation and amortisation) figure, which emerged at £2.5m, down from £3.6m. Reduced fee income contributed to the fall.

I am inclined to ignore EBITDA – a measurement the accountant/author Robert Leach says is "as flowery as it is meaningless" in his latest investment book. Nevertheless, there is some justification for Asher highlighting what is one of the more esoteric measurements – a calculation which, in these mumbo-jumbo days, is beloved by many number-crunchers.

Still, it is perhaps more reliable to concentrate on stock-market forecasts for the current year of a pre-tax figure of around £4.2m, albeit before probable adjustments.

It is clear that Relax endured a raft of special charges last year, largely resulting from the reorganisation and two significant deals. Unless it indulges in another acquisition round – and it is clearly looking at various possibilities – the current year's results should not be too distorted by extra costs.

Relax, rather like the pawnbroking community, is an obvious beneficiary of the credit crunch. It specialises in servicing those who are up to their armpits in debt, offering such palliatives as bankruptcy, debt management plans, IVAs (individual voluntary arrangement) and loans and mortgages.

At one time, the debt management occupation was in some trouble itself as high-street banks, looking somewhat askance at certain aspects of this money-making exercise, refused to play ball. But the stand-off was resolved with a framework agreed for processing IVA claims. Consequently, the major banks are now much more amendable to IVAs and other debt solutions, although their co-operation came at a price.

Yet, with growing unemployment and a dire shortage of credit, there is little doubt that many victims of the credit crunch have been forced to enlist the help of Relax and its rivals.

The two acquisitions provided Relax with compelling cost savings, just at the time trading was growing rapidly. The takeovers embraced PD Recovery and the business that inspired the name change of the enlarged group, Relax Financial. Asher and his team had commenced a cost-cutting exercise before the takeover of most of PD in February last year.

The acquisition cost about £1.2m; not at all an exorbitant price for an operation looking to make £600,000 pre-tax profits. Alongside the deal, the group raised £2.7m, placing shares at 45p. In May, the original Relax company, started in the summer of 2005, commanded a mixture of cash and paper worth some £3m. Its profit was booked at £426,000.

Relax, and half a dozen other shares, are candidates for the No Pain, No Gain portfolio. I intend to start buying again quite soon as there are so many bargains dotted around. But, in these brutal times, shares have a nasty habit of getting cheaper by the day. So I do not believe there is any need to rush in.

My comments about GNE last week were written before the takeover bid was announced. Martyn Ratcliffe and friends are offering 190p a share. Why they did not take the bid route in the first place is something of a mystery.

It seems to be a done deal, with 55 per cent of the capital behind the offer. GNE shareholders should be satisfied, although some think that their shares are being underpriced. But the argument that cash is king should reign supreme.

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