No Pain No Gain: 'It may be time to face the music and sell this loser'

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The Independent Online

The music has become decidedly off key at Springwood. Difficulties at the night clubs and bars group are much more serious than I imagined, prompting thoughts the shares should be dumped from the no pain, no gain portfolio. It had been evident for some time that the founder-chairman, Adam Page, faced a multitude of problems. The shares are 16.5p against my 131.5p buying price.

Last week, without warning, the veteran leisure entrepreneur quit "to maintain the continuing support of our bankers". A sad end to what had been a remarkable career. I first met Mr Page more than 20 years ago. He had already built one disco fortune, selling to Whitbread, and was engaged in a fierce battle to buy a pub company called Midsummer Leisure, once the commercial arm of CAMRA (Campaign for Real Ale), the lobbying group. Midsummer was sold and he developed Springwood with its profitable Zanzibar concept.

Where did he go wrong? I believe Springwood indulged in a shopping spree at the wrong time. At one stage it consisted almost entirely of freehold properties. Then the Kingfisher leisure chain was acquired and a quick-fire series of smaller deals put through.

The expansion brought in many leaseholds - some, it seems, on difficult terms - and soon more than 50 per cent of the estate was in leasehold properties. Stock-market conditions killed off attempts to reduce the debt burden through a rights issue. As borrowings mounted, the group became exposed and vulnerable, just when trading in the hitherto lucrative world of night clubs and late-night bars turned down.

The Zanzibar collection still seems to be doing well. The rest of the estate is creating problems. Mr Page worries about the group's resources to develop closed or underperforming properties and also complains about the "onerous" carrying costs of sites it is trying to sell. A planned property revaluation, which will cut into stated values, will have to be accommodated with the year's figures. At the half-way stage there was a £1.7m loss, the first ever, against a £1.4m profit.

Clearly, the portfolio has suffered a stinging reverse. After the disasters at Profile Media and the unsatisfactory display by City of London Group the temptation to sell Springwood is almost overwhelming. I have stuck with Profile partly because its experienced and talented board remains in place. It is a similar story at City of London.

But Mr Page is not the only Springwood departure. And reshaped boards have an uncomfortable but understandable habit of piling on the agony. Consequently, I expect the dancing group to suffer even further depression before the tempo improves. For the time being, I am sitting tight, although I may be persuaded to unload in the next few weeks.

I am not, as readers know, a fan of the stop-loss procedure, where investors set a rigid selling level, usually 20 per cent below the buying price. Such a system is too inflexible and I have demonstrated its shortcomings. But developments at another portfolio constituent, Galliford Try, have prompted me to adopt a stop-loss variation, what could be described as a hold-profits system. The builder and civil engineer is the subject of takeover action, with Rok Property Solutions, indicating it might pay the equivalent of 51p a share. The general view is Galliford should command nearer 60p.

I have a sneaking suspicion Galliford will hold off the challenge and the shares will fall back from their present near-46p level. My hope is that the 60p valuation will not prove to be too elusive. But, should the excitement evaporate and the shares hit 40p I will move out. A sale at 40p would bet a double-your-money investment.

Another portfolio constituent, Glisten, has achieved its first deal, acquiring at a cost of around £1.1m a chocolate group called Sunya, which last year achieved operating profits of £220,000.

Finally, MacLellan, the support services group. The shares have not produced any lasting fireworks since joining the portfolio at 65.5p, but the group's trading performance continues to be encouraging. At 75p the shares appear undervalued.

Interim profits came out more than 50 per cent higher at £2.3m with EPS up 35 per cent at 2.3p. For the full year the stock market expects profits to nudge £5.7m against £2.6m. MacLellan continues to win new contracts and remains on the lookout for bolt-on acquisitions. It recently paid £400,000, with possible earn-out payments of £2m, for a window-cleaning business with a national network.

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