Derek Pain: No trips on the retail bandwagon

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The Independent Online

Tipping shares is a hazardous occupation, even when the stock market is at its most benign. So trying to pick winners in the present turmoil could be regarded as bordering on the absurd. But as shares have demonstrated since the atrocities in the US there are opportunities for the alert investor to score. Fortune has favoured the brave.

Retailers, buried in the mad dot.com boom, have been particularly strong, encouraged by soaring sales. Anyone who captured Woolworth Group shares in first-time trading has done exceedingly well. Even poor old Marks & Spencer has become a recent retailing hit, helped by a US fund manager.

But I am not about to jump on the retail bandwagon although I suspect it still has some way to roll. Instead, I am returning this week to an old favourite, MacLellan, an increasingly successful operation in the growing support services industry. In May the shares were 61.5p. They are now 65.5p. Since Spring, the group has been a buyer and a seller, with sharply improved half-year profits of £1m. It seems likely to achieve year's profits of around £2.7m, and stockbroker Williams de Broe is looking for £3.6m next year.

Bob Morton is chairman and a major shareholder of the group, a relative newcomer to support services. It acquired what was then the Haden MacLellan outsourcing operation for £14.9m, 18 months ago. Its revamp was completed with the July sale of the old engineering services side to Booth Industries for £3.9m.

A month later came the acquisition. For £5m in cash, shares and loan notes it took over an old London-based cleaning company, Ramoneur. The deal strengthened MacLellan's presence in the South-east. MacLellan's services now include catering, cleaning and security as well as office services. Clients include the famed Bluewater shopping centre, the Inland Revenue, Standard Life and BAA.

Chief executive John Foley is largely behind the MacLellan transformation. He remains on the lookout for "earnings- enhancing acquisitions" but with the support industry one of the success stories, suitable buys must be increasingly difficult to spot.

Normally, I expect constituents of the no pain, no gain portfolio to be secure members of the dividend-paying fraternity. At present MacLellan is unable to pay one.

Because of its balance sheet there are legal restraints on distribution to shareholders. I believe there is an outside chance it will be a dividend-paying company with this year's results. More likely it will wait until next year before sending out the cheques.

So I have decided to recruit MacLellan as a replacement for Global, the ousted beefburger maker. It means, with Mears already a member, we have two support services constituents. Competition may be intense and margins far from rich but the two companies have established strong operations.

At 65.5p, MacLellan's shares enjoy a heady rating. But at around 14.5 times expected earnings they are selling below those of most rival groups.

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