Derek Pain: Small caps are unloved in City but their day will come

No Pain, No Gain
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The Independent Online

It's been a busy few weeks at the no pain, no gain portfolio with four constituents reporting profits or corporate activity. In some respects my15-strong collection of shares has not performed too badly although, like I suspect most investors in these volatile stock market days, there is disappointment at the behaviour of some stocks.

Research suggests many shareholders expect to reap rewards in the next six months. A survey aimed at examining the attitude of "the everyday investor" concludes that 36 per cent of them are looking for a positive return. The research was carried out by one of Britain's major investors, Legal & General, the insurance giant. However, small caps, which dominate my portfolio, remain unloved in the City. But, I believe, their day will come. And we may not have to wait too long for them to return to favour.

The profit announcements amounted to a little and large display. The vending machine group SnackTime is capitalised at just £12.1m, whereas the brewer Marston's is valued at a rather more heady £543m. SnackTime reported half-time revenues up 162 per cent, although pre-tax profits were down from £201,000 to £111,000. The fall is not surprising following an intensive bout of acquisition-inspired restructuring. New contracts continue to be won, and the stockbroker Arbuthnot is looking for a year's out-turn of £1.4m.

Marston's, brewer of such hand pump beers as Pedigree and Brakspear and owning around 2,150 pubs, rolled out a 9.4 per cent underlying pre-tax profits advance to £80.4m. It is holding its year's dividend, putting the shares on a yield of around6 per cent. In the 12 months the group achieved revenue growth of 4.8 per cent, and in the first eight weeks of its current year made further progress.

Like others in the pub trade Marston's, where L&G has increased its holding to 4 per cent, is finding the eating out market particularly enticing. In the past five years it has built around 50 pub/restaurants and now aims to establish some 25a year.

Unfortunately, the takeover action has yet to provide much joy for the portfolio. Patsystems, a supplier of derivative software, is now, as I anticipated, in the sights of its biggest shareholder, ION Trading. Unfortunately the indicative priceis only 14p a share. The portfolio paid 24p.

To pile on the agony the collapse of MF Global could be more wounding than at first thought. The busted US broker owes £900,000, and uncertainty remains about how much of the MF-related business Patsystems will be able to salvage. In addition it felt the need to make provisions of up to £1.3m against clients that are feeling the financial pinch. The group reckons 2012 resultswill be significantly better thanthis year's.

Another round of corporate action has occurred at Plus-traded Rivington Street Holdings, with an on, off and then on again disposal. At first it agreed to sell its financial advice side, Rivington Street Corporate Finance, to another Plus-traded group, Webb Holdings, run by the small cap specialist Peter Webb. Then the deal was called off when Rivington received a higher offer. It transpired the second strike was an in-house affair. A company called Peterhouse Capital, where Peter Greensmith, a director of RSCF, is the main shareholder, put a £3m bid on the table. The £3m is being paid in stages, with most of it inthe form of an 8 per cent secured loan note.

Rivington, planning a move from the fringe Plus platform to the Stock Exchange's Aim market next year, believes its corporate operation may not keep up its impressive profit performance, and is happy to accept £3m for a business acquired for £681,000 five years ago. The corporate operation, representing a host of Plus and Aim companies, achieved profits of £344,000 in the six months to February.

The portfolio has one other Plus stock, NCI Vehicle Rescue, recruited nearly two years ago at 25.5p. The shares are now around the 30p mark. I have been wondering whether to retain them. The last trading report was a little disappointing and various indications from the industry are not too encouraging. Should the shares be dumped, and with Rivington's proposed elevation, the portfolio would be in danger of existing without a constituent from the fringe Plus market for the first time since its early days.

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