No Pain No Gain: A measure of certainty sets Booker free


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The Independent Online

Takeover bureaucrats have killed or watered down many an ambitious deal. But it seems the Booker cash and carry chain is set to get the go-ahead for its £140m acquisition of the rival Makro business.

There was, in some quarters, considerable surprise that the deal was shunted into the sidings while its merits were examined by the Competition Commission. When merger mandarins get involved there is always the danger of various forms of interference, besides a complete block on any manoeuvre. Perhaps, then, it is not surprising that Booker’s shares have enjoyed an exuberant time since the move obtained provisional clearance.

The shares reached an all-time high and at the time of writing were around 124.5p. I suspect the Commission’s deliberations held back the shares, but even so they made progress during this year’s stock market advance. Still, the Makro clearance , which should be finalised next month, has given the shares fresh incentive.

There is, of course, a temptation to lock in profits. After all, Booker has admitted that the acquisition of the German-owned, loss-making Makro operation will take some time to contribute to earnings and could for a time even take the edge off its own profit performance. In addition, Booker shares are already highly rated.

So has Booker reached its own sell-by date? I suspect some will take that view and I would not be surprised if the shares, at least for a little while, surrender some of their exuberance. But, as with Whitbread – the other star performer in the no pain, no gain portfolio – I am hanging on. Some time ago I put a sell price of 80p on the shares. I am now lifting that figure to 100p although I will be surprised if I have to invoke a sell order. “Cut losses and let profits run” is an often heard stock market adage. The portfolio recruited Booker at 24.5p; so far the policy of keeping hold of the stock has paid off handsomely. It is a pity that I have, with some other shares, been far too slow to follow the first half of the old saying.

Two other constituents have occupied my attention. G4S, the security group that caught a cold at the London Olympics, has revealed the full extent of its suffering. After accounting for its now infamous staffing blunder, pre-tax profits dived from £257m to £175m. In 2010 the group turned in profits of £335m.

For the past two years the security group has endured exceptional charges. In 2011 it was £55m, the result of an abortive bid for ISS, a Danish catering and security business. Then last year came the Olympic charges – a cool £88m.

Still, the latest performance masks some decent growth. Turnover was comfortably higher, with developing markets making serious contributions. And the year’s dividend is lifted by 5 per cent. The shares have in recent times been trading above 300p; they are now around 298p against the 264p paid by the portfolio.

TEG is the other constituent on the front foot. Thanks to an impressive second-half performance, the organic waste handler managed to achieve year’s revenue of £22.4m against £17.9m, although gross profits only edged ahead to £4.6m.

But much more significant is that TEG’s pre-tax loss shrank from £8m to £1.3m and at the end of the year the cash pile stood at £3.7m (from £1.6m). At the half-way stage the group recorded a £1.8m pre-tax loss.

On a difficult day in the stock market the shares slipped a shade to 6.5p; the portfolio paid 8p. I had hoped these results would allow the group to escape from my collection of loss makers, but although TEG is clearly moving in the right direction it still has some way to go before the portfolio can actually benefit from its presence.

 Patience is needed. The group has endured a difficult run as its share performance over the years adequately illustrates. After all, the shares hovered around 150p some years ago, and in 2009 they were still above 60p. If recent progress continues there is every chance that the shares will manage to join the winners.

There is unlikely to be a pre-tax profit this year, with the stockbroker N+1 Singer suggesting an adjusted figure of around £500,000 next time round. And of course, dividends remain a distant prospect.

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