No Pain, No Gain: Aircraft firm and pub company would make fine recruits

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The Independent Online

Avation and Capital Pub Co have emerged as the next most likely recruits to the no pain, no gain portfolio.

In the past few weeks I have examined a number of possible constituents and although I have yet to make a decision I am impressed by this chalk and cheese duo.



The portfolio now numbers 14. In recent times I have dumped two underperforming shares and added one. Another member is under threat of execution.



My two potential newcomers have enjoyed strong runs. Past displays are, of course, no recommendation when selecting a share. Indeed it could be argued that their best is already behind them. But I feel there is still plenty of life in my twosome.



Capital, a start-up, began its fermentation a decade ago, raising £15.4m from 575 shareholders. The shares reached AIM in 2007, topping 160p. In the subsequent stock market depression they slumped to around 40p, but have since rallied to 107p. The two main movers, Clive Watson and David Bruce, have spent much of their time in the pubs business.



The company has 30 outlets in and around London. Most are freehold. A recent valuation put a £66.6m price tag on the estate. Unlike many other pub chains Capital, capitalised at £27m, is not overshadowed by huge borrowings.



It is possible, like another constituent, Whitbread, that it will reap rewards from next year's Royal Wedding and the Olympic Games in the following year.



London pubs have displayed much more resilience than those in many other parts of the country which have suffered from a series of destructive influences such as the smoking ban, supermarket price-cutting and Lord Young's non-recession. Capital's interim figures are due. I await them with interest.



Last month Avation, which buys what are called half-life aircraft (a "life" is around 30 years) and leases them to airlines, jumped from the fringe Plus market to full listing – the first to make such a journey. It landed on Plus four years ago, a spin-off from what is now Skywest, an AIM-traded Australian airline. The shares floated at just 4p; they are now 65p – after approaching 80p – providing a £18.3m capitalisation.



According to the researcher GE&CR, Avation shares could stretch to 150p. The group's last pre-tax profits came out at £3.5m against £5m. A one-off foreign exchange gain inflated the comparative figure.



The group, with its AIM-traded 51.2 per cent subsidiary Capital Lease, has around a dozen aircraft. It still has close links with Skywest, with about 30 per cent of its operations related to the Australian airline. Jeff Chatfield is chairman of the three companies.



With worries about the strength of the airline industry receding and interest rates remaining low, Avation appears to be on a blue skies flight. Borrowings are around £44m and Mr Chatfield believes that in the present low-interest environment he should be able to reduce interest charges. Despite its "down under" links the group does not have any Australian borrowings where interest rates are relatively high. I would not be surprised to see Avation embark on a determined expansion programme.



Current year's profits should be around £4m, and with an investment road show a possibility the shares, still a little-known force on the stock market, could start to attract interest.



Now to an existing constituent, Clarity Commerce Solutions, which provides software for such industries as retailing and leisure. I was surprised that it managed to turn a half-time profit of £400,000 into a £663,000 loss. The setback, it said, stemmed from the costs associated with staff recruitment and strengthening the group's infrastructure. Despite the loss, Robert Sanders, an analyst at Arbuthnot, the company's stockbroker, is sticking with a year's pre-tax profit forecast of around £2.1m, indicating a dramatic upsurge in the second six months.



He points out that many software companies rely heavily on the final months of their year and with a batch of new contracts – and, hopefully, more to come – feels the group is continuing to head in the right direction. He is retaining a 55p target price against around the 40p immediately following the figures. Assuming he is right and the group performs to his expectations then Clarity's shares look absurdly cheap.

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