Derek Pain: Turn to drinking to ride out economic woes

No Pain, No Gain

Not many smallcaps make headway in these sobering days. Blavod Extreme Spirits, producing a rather trendy black vodka, is one that is resisting the deep depression. Its shares have climbed nearly 50 per cent to around 5p this year, drawing encouragement from a cheerful trading statement and the attention of some intriguing investors.

Mind you, long-term supporters are in dire need of comfort. Not so many years ago the shares were above 50p with the company able to raise some £8m to finance what turned out to be an unrewarding trans-Atlantic excursion. Now, stripped of its US misadventure, it is capitalised at £3.7m.

Although a veritable tiddler, BES has the distinction of being one of only two wine and spirit groups with a stock market presence. The other, of course, is the awesome Diageo behemoth with a valuation of nearly £22bn. It has rolled out interim profits of £1.4bn. BES’s halfway performance was a much smaller measure – a mere £43,000. Still, that modest profit represented dramatic progress.

For most of its life, BES has been deep in the red. It arrived on AIM around the turn of the century with a black vodka as its main claim to fame. An advertising man, Mark Dorman, had inspired the spirit, which had already gained a degree of appeal among the fashion conscious. To advance its US attraction it merged five years ago with a group embracing drinks with night club appeal. Jeff Hopmayer, creator of the US undertaking, assumed command of the newly enlarged group.

But, not for the first time, an Anglo-American merger did not succeed. Increased sales produced little reward. The group was quite clearly too small to bridge the Atlantic. Takeover talks occurred, but a bidder failed to materialise. In 2007, Hopmayer retired from the scene, buying back the US business for some £400,000. Since the divorce BES has, as I anticipated, sparkled. The vodka’s cult following has remained faithful and new recruits are being attracted. Agencies, such as hangover drink Fernet Branca, Cockspur rum and Château Lafite Rothschild wines, have also helped the company’s move into the black.

For the year ending next month, it is confidently expected that profits will top £100,000. Researcher GE & CR is looking for £350,000 next year. Even allowing for these straitened times and that BES is a small player in an industry dominated by giants, the shares, selling at less than five times next year’s suggested earnings, do look rather interesting.

Indeed with its small, sophisticated circle of drinks, BES could even be in a stronger position to withstand the impact of the credit crunch than the mighty Diageo. The Johnnie Walker to Smirnoff giant was rather cautious when it announced interim figures. Clearly sales and profits growth have slowed. For a long time, its shares were seen as a good hedge against recessionary influences. Now any immunity could be stripped away.

The BES chairman Colin Campbell, formerly of Moët Hennessy, and Richard Ambler, an experienced drinks man who returned to BES as managing director when Hopmayer departed, have in recent times added to their shareholdings. So has Howard Raymond, son of the late Paul Raymond, the West End property tycoon famed for owning the legendary Raymond’s Revue Bar night club. He now holds an 8 per cent share. Another prepared to splash out is Emma Cawkwell, whose father is Simon Cawkwell, aka Evil Knievel, the notorious short seller. She has built a 4.2 per cent holding.

The share register also features, as I mentioned three weeks ago, the SF t1ps Smaller Companies Growth Fund. BES is the fund’s largest single holding with the stake accounting for 8.4 per cent of the vodka group’s capital.

In my younger days, a host of wine and spirit shares graced the stock market. But their ranks were decimated by takeovers. While brewers swallowed each other, they also acquired a taste for wines and spirits. The drinks industry is now a pale refection of its former stock market presence.

Because of its sheer size Diageo would find it difficult to indulge in much takeover activity. But I suspect little BES may display corporate ambitions and use shares for takeovers. Equally likely is that one of the remaining unquoted groups will seek a quote via a reverse takeover – just like the Hopmayer involvement.