Derek Pain: Iceland crisis hampers Booker performance

No Pain, No Gain

A share overhang is continuing to depress Booker, the nation's largest cash-and-carry chain. Although it has rolled out another resilient sales performance, its shares are unlikely to display much determination until the ownership of a 22 per cent stake in its business is resolved.

The holding stems from the Icelandic banking fall-out. Kaupthing, one of the island's troubled banks, acquired the interest in a share shuffle that occurred shortly after I recruited Booker to the No Pain, No Gain portfolio. Since then, an investment company has assumed management of the shares. In October, it said it had "no present intention" of selling. But the Kaupthing interest is clearly not a long-term commitment. And the stock market hates uncertainty. It suspects – in my view correctly – that in the not too distant future the shares will be unloaded. Some other, much smaller, Icelandic share links could also be revised, assuming they still exist.

It is unlikely that the 22 per cent stake will be used as a platform in any corporate action. A placing among, institutional investors, at a discount to the then ruling price, is the most likely route for any Kaupthing escape. In May, Booker is due to move from the junior AIM market to a full listing – an ideal time, I would suggest, for the share sale.

Once the overhang is removed there must be a good chance that Booker's trading performance will be reflected in the share price, although any full re-rating will not, of course, occur until the investment climate improves. Make no mistake, it will do so – the unanswerable question is when.

My own guess is that the stock market atmosphere will become more tolerable in the second half of this year. That's the attitude that will govern my handling of the portfolio. Even if my timing is suspect I do not think any long-term damage will be suffered.

So I am happy to stick with Booker. Chief executive Charles Wilson says sales in the 16 weeks embracing the festive season rose 2.7 per cent with like-for-like non-tobacco sales 5 per cent higher. The tobacco contribution fell, perhaps not surprisingly as the anti-smoking campaign becomes increasingly aggressive. He has also fixed up a deal, running to 2012, to replace an Icelandic loan facility.

Booker, a fully listed group before falling under Icelandic control, returned to the stock market two years ago when it reversed into Blueheath, a largely online grocery wholesaler. The internet is an increasing part of the group's operations with 16-week web sales up 169 per cent at £83m.

Last year, Booker produced profits of £32.4m. At the interim stage they were up 29 per cent at £26.5m. Around £41.5m seems likely this year.

The bleak retail scene must be making life difficult for many of the chain's 400,000 customers, mostly shopkeepers, caterers and publicans. But food sales, an important part of its turnover, seem to be holding up relatively well. And Bookers appears to be winning new customers and an increasing slice of the independent retail market. The portfolio paid 24.4p for its Booker shares; they are now 21p, selling at near nine times prospective earnings.

Another constituent, Lighthouse, a wealth management and financial advice group, has suffered a much sharper fall. Against a 17.5p buying price the shares touched 35p before the stock market collapse. They now bump along at 11.5p with a flat profits performance deepening the gloom.

Still, it is not letting the recessionary atmosphere blunt its ambitions. It has acquired a Leeds-based business with around 50 independent financial advisers. Cost is £1.5m in cash and shares spread over three years. Last year, Lighthouse put through its biggest deal, acquiring rival Sumus for £12.6m.

Although 2008 profits are expected to be around an unexciting £420,000, there are high hopes £2m will be achieved this year. The shares are selling near 6.5 times possible earnings and carry a 5 per cent yield. With some £12.5m in cash against a capitalisation of £14.5m it is not surprising that directors have been buying stock. In recent months they have picked up nearly 1.2 million shares with Allan Rosengren, former boss of Sumus and a joint chief executive of the enlarged group, heading the little spending spree.