Derek Pain: Servoca may finally be ready to reward Morton's persistence

Nearly three years ago I applauded the resolution of serial investor Bob Morton. He has a string of small-cap interests, often adopting a hands-on approach. One of his holdings, a company then called Multi Group, had been particularly troublesome but he refused to walk away. Instead, he reshaped the group and set it, he then believed, on the path to success and riches. Just to underline the revamp, he adopted the obligatory new name – he settled on Servoca. For once his initiative did not succeed. So, displaying even more determination, he orchestrated another revamp. And this time the Morton magic seems to have worked.

Mind you, Servoca faces difficult trading conditions. Much of its activity embraces areas vulnerable to coalition spending cuts. Indeed, it has already experienced some curbs. But Andy Church, the chief executive who arrived in the second reorganisation in November 2008, remains relatively upbeat. He has not in recent weeks suffered from any more belt-tightening. Still, he believes the uncertainty generated by the emergency Budget and threatened Whitehall cost-cutting manoeuvres could affect trading.

Consequently, the stockbroker FinnCap has reduced this year's profits forecast from £2.7m to £2m. At the half-way stage, profits (helped by the company's own cost reductions) were up 10.5 per cent to £950,000. Last year, with Servoca enjoying the first fruits of Mr Church's involvement, it produced £2.2m. Analyst David Buxton is shooting for £2.2m next year.

It could be argued that Servoca is in the wrong businesses at the wrong time. It supplies medical staff and teachers and runs a security operation and a police support service. In certain areas, Mr Church believes Servoca could actually benefit from the squeeze on public-sector spending. For example, it could score if police forces are tempted to use more civilians for back-office work, thereby freeing more highly-paid police to combat criminality if their numbers are reduced by redundancies.

Mr Morton is a doyen of the small-cap brigade. He has a wide spread of interests. His stable includes Armour, the consumer electronics group, Tenon, an accountancy practice, and WFCA, an advertising and marketing business that, if rumours are correct, is planning a significant deal. His family investment in Servoca amounts to about 30 per cent. It has, so far, been an unrewarding excursion. At one time, Multi's shares were in the stratosphere. The former tool hire company then decided to venture into medical recruitment. A deluge of difficulties followed and the shares, once above 800p, slumped to less than 50p.

One headache was created by a company called Global Medics, for which Multi paid the equivalent of £13.7m. It was later unloaded for a mere £520,000. For the first Morton reorganisation (a reverse takeover, plus new management and a cash-raising exercise), the shares were valued at 25p. Despite further expansion through a handful of acquisitions, Servoca lost £7.2m. Mr Church was then drafted in and more capital raised at 8p a share.

Servoca may have swung into profits but its shares are still a long way from recapturing anything approaching past glories. As I write, they stand at 9.5p, not far from their all-time low. Capitalisation is about £12m. And FinnCap, not surprisingly, is not looking for any improvement. Mr Buxton says: "The valuation remains low but, given uncertainties, it is difficult to see out performance in the near term."

Mr Church was associated with one of Mr Morton's earlier successes. He was a director of Lorien, an online recruitment company. Many of Mr Morton's Lorien shares (he had nearly 50 per cent) were acquired at 40p. The company subsequently fell to a 100p a share takeover offer.

Lorien, which once held merger talks with Servoca, was earmarked to join the No Pain, No Gain portfolio. But I missed the boat when the shares surged to 70p. Despite its two revamps, Servoca must be the worst performer in the Morton empire. But I believe its day will come.

Some other Morton shares are feeling the pinch. The stock market is going through a difficult phase. They occur every so often. Buy-and-hold investors should not despair. During my 50-plus years in the City I have witnessed many such setbacks. They often represent ideal buying opportunities.

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