No Pain, No Gain - Our Man's Portfolio: Merrydown acquires sweet taste of success

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SINCE MERRYDOWN was founded by two former prisoners of war nearly 55 years ago it has endured a sweet and sour existence. On several occasions the cider group has teetered on the brink of disaster, only to demonstrate its undoubted qualities of survival. It is currently on a familiar route - the comeback trail.

But this time round there is a decidedly rosier tinge to its prospects. It could be set for a long period of steady and sustainable progress.

All the signs are there. After the last setback, caused by the sudden slump in alcopops, a new management team was drafted in and a pounds 6m cash- raising exercise undertaken.

As part of the revamp, two companies befriended the stricken group. SHS, an unquoted food and drink distributor, took a 6.3 per cent stake and Shepherd Neame, the Ofex-traded family controlled brewer of Bishops Finger fame, a 4.19 per cent interest.

Two experienced cider men, Andy Nash, the chairman, and Nigel Freer, the chief executive, are busy reshaping the group, and recent results suggest they are on the right track.

Any investment in a company which has swung violently between profits and losses and had such an erratic time must be an act of faith. Merrydown could still come a cropper and the shares are not for the faint hearted. But I feel they represent an intriguing long shot and should be added to the no pain, no gain portfolio.

The shares, at 35.5p, are roughly half way between their 12-month high and low. They have been higher during the company's colourful career, once hitting 400p.

The group is by far Britain's smallest quoted cider maker, dwarfed by HP Bulmer and Matthew Clark. In its heyday it probably had 4 per cent of the market with its English wines (red currant and so on), drink agencies and health foods making up its portfolio.

Even in its earliest days, Merrydown cider was regarded as a distinctive brand, noted for its strength. Indeed the success of the brand caused the Government to change Britain's excise duties in the 1950s - a move that heralded the first Merrydown crisis, as the sharp increase in taxes forced up the price of its cider.

Still the group, born when ex-POWs Ian Howie and Jack Ward decided to commercialise the wine-making ability they developed in wartime camps, managed to overcome the setback. The last debacle involved Two Dogs, the Australian alcopop which the then Merrydown management saw as the answer to the pressure the two giants were exerting on its cider sales. But the Two Dogs brand, after brief success, fizzled out.

Today Merrydown is concentrating on its mainstream Vintage cider and Shloer fruit drinks.

It intends to spend heavily promoting the two brands, with SHS and Shepherd Neame providing much of the distribution support.

The Nash/Freer revamp has been far reaching, with brands shelved and staff slimmed down. In the year to March there was another staggering loss although a pounds 493,000 operating profit highlighted the dramatic extent of the recovery so far achieved.

After the cash-raising exercise, the group is, however, in a strong financial position and should have the wherewithal to support the cost of the undoubtedly heavy, by the standards of a small company, planned promotional spend.

If Merrydown's research has offered the right guidelines then it looks set to make progress despite the fierce competition in a far from buoyant cider market. Although the stock market has shown a little disappointment over the pace of recovery after some observers made over-optimistic assumptions, Merrydown has clearly got its house in order.

Nigel Popham, the Teather & Greenwood analyst who is an authority on small drinks companies, is positive. He sees pre-tax profits this year of pounds 760,000, climbing to pounds 1.2m and then to pounds 1.5m.

On last year's figures the shares are selling on a heady 40 times earnings. If this year's Popham forecast is met then they are on 18 times.

Drinks, in the shape of Allied Domecq (up from 482.5p to 624p) and pubs chain Paramount (15p to 22p) have ignored the pain and emphasised the gain of investing, boosting our portfolio. I have every expectation Merrydown will also perform, happily ignoring its 1960s catch phrase "gently down Merrydown".