No Pain, No Gain: Excellent performance fails to meet expectations

Merrydown, the little cider and adult soft drink group, this week failed to excite the stock market and, I suspect, left many shareholders a shade disappointed. True, its year's results were excellent. Well up to expectations. But an even better performance had been anticipated by some of us.

Merrydown, the little cider and adult soft drink group, this week failed to excite the stock market and, I suspect, left many shareholders a shade disappointed. True, its year's results were excellent. Well up to expectations. But an even better performance had been anticipated by some of us.

In my younger days there was a general belief that a company would top, by perhaps as much as 10 per cent, profit forecasts, particularly those made by its house stockbroker. So when, earlier this year, Merrydown said profits would exceed stock market forecasts and its own stockbroker, Teather & Greenwood, upgraded its estimate to £1.7m, I thought more than £1.8m was in the barrel.

Well, that T&G figure was uncannily accurate. Merrydown produced £1.72m. Either there was a slight sales slowdown in the dying weeks of its financial year or the old policy of underplaying scheduled results to leave "a little extra for the stock market" was forgotten. I realise my disappointment exhibits a large degree of churlishness but I think the initial reaction of the group's shares - a mere 0.5p gain to 94p - suggests my point has some merit and support. Still, I must not let my own expectations obscure what is truly a remarkable performance.

The £1.72m profit represents a cool 26 per cent advance; turnover was up 20 per cent at £20.3m, with once again the Shloer soft drink providing most of the sparkle. For a little company like Merrydown (capitalisation only £21.3m) to outpace much bigger rivals and turn Shloer into the best-selling adult soft drink in the land is a considerable achievement. To add to the celebrations the group's cider sales, which had stagnated for years, recorded a four per cent increase with its vintage brand up 10 per cent.

Merrydown has a colourful history. Three ex-prisoners of war, who got the taste for making cider and wine when they were behind barbed wire, launched the business in 1946, each investing £100. Since then the company has had its ups and downs and when the present management arrived it was, not for the first time, feeling the pinch. The chairman, Andrew Nash, and the chief executive, Nigel Freer, decided to concentrate most of their efforts on Shloer, a Swiss drink that had been around for years without attracting much interest.

They repositioned it as an adult drink and the rest, as they say, is history. Last year Shloer sales advanced 30 per cent and, with a planned baby bottle push aimed at pubs, it should make further headway this year.

Messrs Nash and Freer also avoided the worst excesses of the cider market, refusing to get drawn into some of the madcap promotions so beloved of other cider makers. But as the industry has stabilised, their low-key approach is reaping rewards and cider is no longer the poor relation of the group.

Merrydown is cash rich and will probably indulge in more share buy-backs. It is again increasing the dividend - this time by 29 per cent. The no pain, no gain portfolio recruited the shares at 35.5p. They took a time to get going, but once the success of the Nash/Freer policy became evident they have been one of my strongest performers. I am happy to stay with the shares, although I may temper my profit expectations. As Shloer continues to grow there is always the chance of takeover action. SHS, a privately owned food and drink group, has a 10.5 per cent interest.

S&U, the finance group which is now the longest-serving member of the portfolio, is going well according to a very brief statement at last week's shareholders' meeting when the chairman, Derek Coombs, said trading continued to make encouraging progress and "I remain confident for the year as a whole".

I alighted on S&U in April 1999 at 292.5p; the shares are now 522.5p. Since I recruited S&U it has encountered a few problems although the shares have, with the exception of one difficult hiccup, remained above my buying price.

There is little doubt it is a well and tightly run group. One of its main attractions is the dividend yield - a heady 5.5 per cent. The no pain, no gain portfolio has always attempted to provide a happy blend of relatively safe high-yielding shares and low or non-yielders where prospects are perceived to be encouraging. S&U, with its strong share performance, has offered the best of both worlds and I see no reason why it should not remain in the portfolio.