No Pain, No Gain: Boardroom battles are sapping my confidence

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The Independent Online

Lennox, recruited to the "No Pain, No Gain" portfolio only last month, could well achieve the dubious distinction of becoming its shortest serving constituent. An unexpected boardroom bust-up has me wondering about the merits of its shares and whether I should retain them.

I have, despite my misgivings, decided to hold fire for the time being. The shares, although below my buying price, have not fallen dramatically. But I do not want to have to contend with another basket-case and it will not take much more weakness to prompt me to cut my losses. I acquired the shares at 64.5p - they are now around 59p having moved above 70p before the outbreak of boardroom hostilities.

I was attracted to Lennox because it spotted a lucrative niche-market. It has established a thriving business in Spain catering for expats and holidaymakers who want to supplement their days of sunshine and Spanish fare with British food and drink. The company distributes more than 1,500 UK lines through some 800 outlets, ranging from big hotels to family-owned shops and bars. Last year it achieved profits of £1.7m and I was expecting more than £2m this year.

My profit hopes may well be realised. But the boardroom discord and upheaval does not inspire confidence. It is possible that Lennox will continue to prosper, but shareholders undoubtedly face anxious times as the company seeks a new chief executive to replace the ousted Peter Voller.

He lost the boardroom battle. At the yearly shareholders' meeting his re-election was opposed by, among others, David Franks, the operations director in Spain, who has taken over as chief executive for the time being. The director Laurie Grove was also voted out and Bob Burns, who quit last month, was recalled.

Franks has 16.4 per cent of the equity and following a sale a day or so before the meeting to accommodate interest payments Voller held 21.54 per cent. Lennox only arrived on the stock market in December and it seems inconceivable that such devastating management ruptures should occur so soon after flotation. Surely the company's advisers should have been aware of the discord?

It's all very unsettling and not the sort of behaviour I expected. Obviously, confidence has been severely shaken. A further worry is Voller's shareholding. If he tolerates his removal, his stake will weigh heavily on the share price until the overhang is cleared. There is the possibility that he will not accept the vote and will prolong the battle by attempting to regain power. That could be even more damaging to the shares.

Lennox shares are quite lowly rated. But another retailer, ASOS, which I have touched upon in the past, is a much more expensive proposition. Its shares are probably selling at around 70 times last year's earnings. Profits, before tax and amortisation of goodwill, are expected to double to at least £2.2m this year which, with a modest 10-per-cent anticipated tax rate, means the shares are on some 25 times prospective earnings.

ASOS (originally asSeenonScreen) is an internet retailer, and is therefore avoiding the current difficulties besetting the high street. Last year warehouse problems retarded its progress. This weekend the group is due to move into new warehouses and it should be in a stronger position to accommodate this year's expected Christmas rush. The firm specialises in cut-price celebrity fashions, for women in the 18-to-34 age bracket.

The shares were around 5.5p early last year. Once investors became aware of the internet potential the price stormed ahead before the warehouse problems prompted profit estimates to be trimmed.

Although the group's prospects look excellent, I feel the shares are probably ahead of events. Still, this old Luddite's record with ASOS is far from impressive. I decided not to recruit them into the "No Pain, No Gain" portfolio because I felt they were too expensive at 30p. Indeed, my advice then was that investors should wait until the shares fell back to nearer 20p. In the event they never returned to such a level romping ahead and nudging 90p at their peak. They are now around 68p.

There is, of course, always the possibility of takeover action. Some established retailers have been slow to wholeheartedly embrace the internet. So ASOS would represent a quick, if expensive, log-on for them. It has more than 3 per cent of the internet fashion market, which was worth £644m last year. If online selling continues to expand (overall it is said to have accounted for £14.5bn last year) then the ASOS appeal could certainly entice one of the retail laggards.

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