No Pain, No Gain: A plateful of problems for the lacklustre Lennox

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The Independent Online

Intriguing goings-on at Lennox, the struggling food and drink distributor that enjoys the dubious distinction of being the basket case of the No Pain, No Gain portfolio.

The shares bump along at a mere 2.75p, compared with 64.5p when they entered the portfolio in the summer of 2005 and a 66p peak. After a bright start to stock market life, the group has endured a wretched time, pounded by boardroom brawls and a slump into losses that forced an expensive rescue package.

Operating in Spain, and selling mainly British goods to expats and holidaymakers, it is my second constituent to run into deep trouble. The other was Profile Media.

Although the portfolio, started in 1999, remains comfortably in the black, I am dismayed by the performance of Profile and Lennox. Profile shares are now worthless, and Lennox could inflict a damaging hit. But perhaps the loss may not be quite so severe as the current share price indicates. For two stakes have been accumulated. Rakesh Sehgal has rapidly put together a 27.8 per cent holding with the estate of a Zimbabwean investor accounting for 10.1 per cent. Some former directors also have significant interests.

It is, however, Sehgal's activities that are creating excitement. His motives are shrouded in mystery. He is only a few percentage points away from triggering an obligation, under the City takeover code, to mount a bid. If not a full takeover, he could be thinking of a reverse deal. He is known to have Spanish textile activities and is thought to enjoy links to clothing businesses in this country.

Lennox has a complicated capital structure. The rescue package included a large slug of convertible loan stock and possible deferred shares could hinder any corporate activity. To add to the uncertainty, the company's most recent figures, covering the first half of last year, showed a £856,000 loss. In the previous year, the deficit was £2.4m.

Hargreaves Services, another constituent, is happily far removed from the sort of problems haunting Lennox. Indeed the portfolio is in the black with the shares at 568p against a 417p-buying price. Interim figures more than justify their progress. Mind you, like so many microcaps the shares are well below their peak – 644p hit last year. They were floated at 243p in late 2005.

Half-year profits emerged at £6.6m, up from £4.1m with sales up 70 per cent at £174.3m. For the year, stockbroker Brewin Dolphin is looking for £17.1m against £9.6m last time.

Although deep in the coal industry – it is the UK's largest importer and owns the Maltby mine in Yorkshire – Hargreaves has not enjoyed much benefit from the rise in the price of coal because of long-term contracts. Chief executive Gordon Banham says: "Although this limits the opportunity to exploit higher prices in the short term it is more than offset by the benefit of increased predictability of profits."

He is lifting the interim dividend by 10 per cent to 3.3p a share. Besides coal – and coke – the group, which has grown rapidly through acquisitions, embraces such activities as transport and waste disposal. I would be surprised if Hargreaves does not accomplish more expansion in its current year.

Finally, Wyatt, the little online support group. It has sold – for just £1 – some of the assets of its fire risk assessment business, Risksmart. Buyer is the company's management. In the year to March, Risksmart suffered a £70,000 loss on sales of £1.2m.

Following the disposal, Wyatt is largely an online employment services group. Last year, despite Risksmart's negative contribution, it achieved pre-tax profits of £241,000 and produced £187,000 in the six months to the end of September. Chairman Bob Holt, creator of the successful Mears support services group, almost clinched a transformational deal in the summer. He remains on the lookout for acquisitions.

The portfolio paid 27.5p for Wyatt's shares. They are now a miserable 8.5p. Clearly I got my timing wrong, arriving far too early. Still, after a difficult period, the group is making headway and I would expect the shares to reflect the improving outlook when the traumatic sell-off, which has devastated so many smallcaps, is consigned to the history books. In the meantime, patience is the name of the game when contemplating shares on the stock market undercard.

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