Derek Pain: Toasting a good stock performance from brewer
No Pain, No Gain
Saturday 26 March 2011
A sharp intake of breath greeted the yearly results from Mears, the high riding support services group that is a constituent of the no pain, no gain portfolio. In recent times the shares reached 326p but the stock market has slipped back since then and when figures were announced the price was just above 300p. It has since fallen to 265p – lowest for more than six months.
What created such a sharp reversal? The results are quite good but the trouble is analysts were expecting an even better display and their disappointment prompted some serious selling. The group, largely involved in social housing and home care, is something of an old timer as far as the portfolio is concerned. The shares were recruited in its early days at 23p and sold at a handsome profit. They were re-recruited three years ago and have, as I write, slipped a little below the buying price.
It appears that Mears' 11 per cent revenue increase caused some disappointment but operating profits were up no less than 27 per cent at £31.3m and the dividend lifted 18 per cent. However, special charges, relating to a minor take over spree, left "true" pre-tax profits at £16.4m, down from £18.4m. Still at the adjusted profits level Mears produced around £28.9m and stockbroker Collins Stewart is looking for £35m this year. Although it should be immune from most government-inspired cuts, the group operates in a difficult environment that has seen competitors, such as Connaught and Rok, go to the wall. Its shares have enjoyed something of a fancy rating which would not tolerate any perceived slip up. I believe that in view of the group's record and potential the price has been hammered far too harshly. I expect the shares, now selling at around nine times expected earnings, to regain their lost strength in the months ahead.
G4S, another constituent, has also produced year's figures that failed to impress the stock market. Rather like Mears its shares were hit too hard. The Anglo-Danish security group, guarding next year's Olympic Games, produced pre-tax profits of £330m, a gain of 9 per cent. The dividend is lifted 10 per cent. G4S spread its net last year, spending £65m mopping up smallish businesses. It plans to increase its take over spend to some £200m this year when profits could top £400m. The shares, around 257p against a 264p buying price, could be selling at 11 times estimated earnings.
Marston's, the portfolio's beerage representative, has rolled out an upbeat trading statement. Its shares, at 96p, reside just above the buying price. The nation's second largest traditional brewer (owning both breweries and pubs) has achieved improved performances at its three divisions – brewing, managed pubs and tenanted and leased pubs. The shares are selling at some 8 times likely earnings and offer a 6.2 per cent dividend yield. Perhaps, in view of the tight financial climate, not an outstanding buy but still a worthwhile hold.
Finally Rivington Street Holdings, a recent recruit. When the portfolio first became interested in the group it had corporate advice, events, financial software, public relations and tip sheet interests and could be described as a City conglomerate. But nowadays it also embraces such diverse activities as limestone quarrying in Canada and pharmaceuticals. Both are small excursions. So is its latest venture – restaurants. It has acquired a Clerkenwell (London) Italian restaurant, Cantina Augusto. The eaterie cost just £1 and the assumption of liabilities of £220,000.
Shares of the company behind the restaurant, also called Cantina Augusto, are suspended on the fringe Plus market. It was launched some years ago with aspirations to create a chain of Italian-style restaurants but has lamentably failed to perform and operated from just the one outlet when Rivington took it out of its misery.
The deal includes Rivington receiving nil interest loan notes that can be converted into a substantial share stake in Augusto. As a Plus shell, the company could emerge as a useful Rivington satellite. And what has now become a fairly widely spread conglomerate sees restaurants as a useful addition to its interests. It plans to revamp Augusto's one surviving outlet, is already negotiating for a second site and aims to develop a small chain. The shares, recruited at 27.5p are 41.5p.
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