Derek Pain: Sunshine had cast a shadow over Costa but the portfolio is up

No Pain, No Gain
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The Independent Online

Some of the stars may have lost just a little lustre but the "no pain, no gain" portfolio made progress in the third quarter of this year. My two recent recruits edged ahead and a couple of loss makers moved into the black.

Whitbread, the leisure group, created a little discomfort as growth at its booming Costa Coffee chain slowed slightly. The hot summer was the negative influence. Many retailers enjoyed a sunshine uplift but coffee parlours, perhaps not surprisingly, lost just a little of their appeal. A return to more typical British weather will, no doubt, get the coffee mugs flowing again.

Even so, in the first 24 weeks of Whitbread's year, coffee sales were up an impressive 20.8 per cent. The chain's continuing overseas expansion – there are now 283 outlets in China – should help to nullify any more hot spells in this country.

With the Premier Inn budget hotels chain advancing sales by 12.1 per cent and the near 400 restaurants, despite a second quarter dip, producing sales growth of 2.5 per cent, total half year sales were a remarkable 12.4 per cent ahead.

I don't know what the stock market expected but the shares responded to the coffee slow down with a nasty hiccup, falling below 3,100p. As I write the price has recovered somewhat although it is still some way below its 3,311p peak.

The group, keen to expand, is investing heavily in hotels and coffee shops. It still has, I believe, a long way to go before saturation in this country is reached. But British coffee growth will obviously get more difficult. Even my local second rate – probably third rate – high street has been graced recently with a Costa parlour. Whether the footfall justifies such expansion remains to be seen.

During the quarter I ditched two unprofitable investments – G4S and Northern Petroleum – and recruited Alkane and Lloyds Bank.

Although Alkane, an alternative power supplier, failed to electrify investors the interim profits were, nevertheless impressive. But the shares had enjoyed a good run ahead of the figures and pre-tax profits of just over £1m against £684,000 were, it seems, largely discounted.

Alkane has an intriguing role in the power game: it captures methane gas from abandoned coal mines and sells the resultant electricity. It also has shale gas licences that it is currently assessing. Chief executive Neil O'Brien comments : "With the very real prospect of a shortfall in energy supply in the UK, we will continue with our strategy of growing output and installed capacity." Stockbrokers Liberum and VSA are keen on the stock with VSA according a 48p target price.

Lloyds, at the behest of the European Union, has granted independence to 630 branches – they are now under the TSB banner. With the Royal Mail flotation apparently scheduled in the next few weeks, it had been assumed the Government would postpone any Lloyds sale until next year. But this week it emerged that part of its stake – 6 per cent – has already been unloaded at 75p to City institutions.

Essenden, the ten-pin bowling group, slipped into a modest loss; the portfolio had to contend with two other loss makers. SnackTime, the vending group, has made a modest impression but the shares remain deep in the doldrums. TEG, the environmental group, is in the red but I remain hopeful it will eventually move into the black.

Brightside, the insurance group, appears to have escaped the clutches of Gibraltar-based predator Markerstudy. When negotiations opened the indicated take out price was 27p. But a subsequent trading statement created a rethink and a price of 20p/22p was suddenly dangled before the Brightside board. Such a valuation failed to impress and Brightside now has to contend with an 11.4 per cent, potentially hostile, shareholder. Further action, possibly involving Markerstudy, is likely to occur.

The portfolio is now valued at nearly £116,000, a gain of around £8,000 since the June review. Don't forget dividends – and dealing costs – are excluded from my calculations.

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