No Pain, No Gain: MacLellan's figures may hide the true picture

I am growing increasingly confident about the prospects for MacLellan, the support services group with activities ranging over such areas as cleaning and security. Since recruited to the No Pain, No Gain portfolio four years ago I have on a number of occasions managed to resist the temptation to give the shares the old heave-ho. It was not as if the company had performed particularly poorly; it was just that the shares seemed to lack stock market appeal and were destined to remain in the ranks of the great unloved.

The world of investment is not always rational. Remember a few years ago when Stagecoach, another constituent, was driven down to 10p? It was a ridiculous valuation. The portfolio, which had paid 80p, held its nerve and the shares gradually recovered; they are now above 100p although their recent performance is causing me some anxiety.

MacLellan has never created as much concern as Stagecoach. Its shares have not collapsed. The portfolio paid 65.5p and although, at times, they displayed enthusiasm it has generally been a lacklustre display with the price frequently hovering a few coppers either side of my buying level.

But the atmosphere has improved markedly this year. Early on a takeover bidder appeared. An offer of around 80p a share seemed to be on the table but the MacLellan management - rightly in my view - thought it was being short changed and wanted a figure nudging the 100p mark. So the bid evaporated. Then investment house Investec, the company's stockbroker, made encouraging noises, pushing the shares to around 80p. Subsequently chief executive John Foley produced interim figures showing that the Investec analyst Guy Hewett's enthusiasm was not misplaced and the shares have held on to the gain he inspired.

Hewett thinks the shares are undervalued. I agree. Like so many acquisitive groups, MacLellan's results have been distorted by special charges. Last year true pre-tax profits, swamped by a £5.3m raft of exceptional items, emerged at £1.5m, down from £3.3m. Although many of the charges were merely accountancy exercises and did not involve anything so crude as hard cash they, nevertheless, left the declared profit looking pretty uninspiring.

In the seven years since it started to transform itself into a support operation MacLellan has put through 10 acquisitions and made three disposals. This year it looks as though takeover deals, unless exceptional opportunities fall into its lap, will be ignored. That should allow it to report a far more impressive true profit.

At the halfway stage the support group produced pre-tax profits of £1.75m, up 84 per cent. For the year Hewett is looking for £5.3m, a huge improvement on last time's £1.5m. The much stronger position will also be reflected at the pre-exceptional level with the figure improving from £6.7m to £9.1m. The group, one of the companies headed by the serial investor Bob Morton, joined the dividend list a few years ago. It does not pay interim dividends. With more than 800 shareholders it feels it would be difficult to justify the cost. But it has displayed a pleasant habit of producing chunky yearly payments. This year it should at least manage 1.25p a share with probably 1.5p in sight next year.

MacLellan is, I feel, a good example of how company profits have become much more confusing. In years gone by accounts were relatively straightforward. Then so many of the special charges now so beloved by accountants did not feature. I question whether the changes have produced many benefits for anyone with, of course, the exception of accountants.

Still its an ill-wind... Profile Media, the portfolio's worst performing constituent, has produced a £260,000 interim profit - thanks to a one-off windfall. In the corresponding period last year it suffered a £1.1m loss. Profits on disposals are largely responsible for the long overdue return to the black. Even so it is heartening to see that trading losses have been sharply reduced.

Profile shareholders will meet on Monday to decide the group's future. They have, as the law demands, been called together because net assets are now less than half the paid-up share capital. Chairman David Ellingham is known to be seeking new capital and he could well unveil cash-raising plans. In June Profile's auditors refused to sign off the accounts because they were not convinced there was enough cash in the kitty. Well, Profile has defied the odds and is still with us. The group, slimmed down by a series of disposals, could be on the verge of pulling off what would be an astonishing comeback. I am growing increasingly hopeful that things can only get better .

cash@independent.co.uk