Derek Pain: Toasting the fly-away success of latest portfolio additions

No Pain, No Gain
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The Independent Online

My most recent recruits to the No Pain, No Gain portfolio are enjoying an encouraging run, helped by impressive trading statements. Avation, snapped up at 83.5p, has topped 100p and the Capital Pub Co frothed to 136p from 120p. Since their arrival last month they have comfortably outperformed the two replaced constituents, and Private & Commercial Finance.

Capital, with 32 pubs in and around London, continues to enjoy robust trading, with revenues up 23 per cent in the first 44 weeks of its year. Indeed, it appears that its sales growth has actually accelerated. But the cash-hungry group is once again tapping the stock market for funds, raising £2.3m through a private placing. I have, on many occasions, complained bitterly about these placings when a privileged few are invited to subscribe while the main body of investors is left out in the cold. The Capital exercise has, however, a significant redeeming feature. The shares are being sold at the then ruling 128p stock market price. In most placings the issue is fixed below the existing level. Indeed the discount can be quite considerable.

So, Capital has avoided my main charge of discriminating against most shareholders and favouring a small band of new and existing investors. I admit that those enjoying the placing saw a rapid profit as the trading comments quickly pushed the shares to 136p. But existing shareholders have not done badly. Still this latest cash-raising – Capital swallowed £2.9m at 103p a share in July – caught many observers on the hop. It appears that the group had recently indicated that it did not plan any more share issues, diluting existing shareholders. But like so many assurances these days it did not last long, with institutional attention and expansion prospects cited for the U-turn. Apparently, the investment giant BlackRock displayed interest and Clive Watson, the ex-Regent Inns man who is chief executive, believes some lucrative pubs deals currently exist.

I think I detect a slight tendency away from discounted share placings benefiting a privileged few. Last year, a smattering of offerings materialised at around the ruling market price or arrangements made to allow the body of shareholders to participate. Wessex Exploration, a Plus-traded company on its way to the AIM index, is one that accompanied a placing with an open offer, thereby allowing all its shareholders to take up new shares at 2.5p when it pulled in £1.9m. As its shares have since doubled, it was clearly the correct procedure. Interestingly, the chairman of Wessex is David Bramhill who, when he was chief executive of Nighthawk Energy, indulged in about six private placings, raising comfortably over £50m. With its shares at about 10p, Nighthawk's current capitalisation is down to less than £40m. One factor often mentioned in support of private placings is they are cheaper and take less time and effort than rights issues or open offers. Unless there are survival doubts demanding speedy action, I believe shareholder democracy – treating all investors the same – is worth any extra effort and expense.

Avation, the aircraft leasing group, has achieved interim pre-tax profits of £2.8m against £1.5m and indicated it should produce a similar amount in its second half year, pushing the year's out-turn to well above earlier expectations. It continues to adjust its debt and reports that a £5m long-term loan has been repaid. Still it borrowings are likely to increase substantially as its proposed deal with two Australian airlines, Skywest and Virgin Blue, is completed. It plans to provide up to 18 leased aircraft and, as far as I know, has yet to raise any of the necessary cash.

I am still on the lookout for recruits but selection seems to be getting more tricky. In 2009, I nearly embraced Healthcare Locums. But I missed the appointment as the shares soared. They subsequently endured a torrid time and are currently suspended over accountancy problems.

I am thinking of adding Morrisons supermarkets but a UBS pronouncement that profits warnings are increasing and retailers are in the firing line has prompted some hesitation. I do feel, however, that the portfolio would benefit from the inclusion of another blue chip, providing ballast to my collection of small caps.

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