UK Edition
Questor: one of our Aim stocks has lost 50pc of its value. Here is why we are holding on to it
Questor Inheritance Tax Portfolio: Gama Aviation needs to sharpen up its act but the business still has a lot of potential
London's junior market, Aim, from which we choose the holdings for our Inheritance Tax Portfolio, is not for the faint-hearted – the tax breaks are there to compensate for the risks involved in buying young, growing companies – but even so we did not expect one of our picks to lose half of its value.
But shares in Gama Aviation have fallen by 46.8pc since we added them to Questor’s IHT Portfolio in January. They lost almost 18pc last week after the firm said in a trading update that full-year profits would be about $3m (£2.3m) less than previously expected.
We asked Nick Hawthorn of Downing, whose holding of Gama prompted our original tip, for his reaction.
He said his firm had not sold any of its shares but described the trading update as “very disappointing”. He said investors’ expectations had been poorly managed after Gama raised £48m from shareholders in March.
Hawthorn attributed the profits warning to increased expenditure in pursuit of growth that had yet to produce returns. He said the firm’s decision to pursue organic growth, rather than acquisitions, in its American operations would be slower to achieve results but progress was being made and returns on investment would be better in the long run.
“We believe the business has attractive attributes such as visibility on management fees and maintenance contracts and global scale, which brings a competitive advantage and barriers to entry,” he added. “We think there are also potential margin improvements available across the business.”
He pointed out that various exceptional costs should fall away over the coming months, which should result in “cleaner” financial results.
A new finance director should provide “further financial rigour” and enable the company to improve forecasting and the setting of “achievable expectations”, Hawthorn said.
For the moment we will hold on.
Update: Michelmersh
There has been better news from another holding, Michelmersh, the brick maker that also joined our IHT Portfolio in January, although we are currently sitting on a paper loss of 3.4pc.
In its interim results published in September, the company said turnover had risen by 43pc to £23.1m, profits before tax increased by 57pc to £3.8m on an “underlying” basis and the dividend would rise by 51pc to 1.06p per share.
Martin Warner, the company’s chairman, said: “With a robust order book for the rest of this year and into next year, and the market demand for bricks remaining strong, the outlook is positive and we are confident in meeting our full-year targets.” Hold.
- Questor archive: telegraph.co.uk/questor
Income Portfolio update: Dairy Crest
Sharp movements in a share price normally come on the day of a results announcement. But in Dairy Crest’s case the shares barely moved on Wednesday following publication of its interim figures, whereas they had lost 6.1pc six days previously without any news from the company.
That decline followed release of a note from Investec, the broker, which trimmed about 2pc from its profit forecasts for Dairy Crest. However, in its results statement the company said its expectations for the full year were unchanged. Nonetheless, the shares are still 6.3pc below where they were before Investec published its note.
Sales rose over the half to Sept 30 by 2pc to £224.9m, while “adjusted” profits before tax rose by 13pc to £22.7m (the reported figure fell sharply because of one-off factors last time).
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Mark Allen, the chief executive, said the company was pursuing “a number of opportunities” to take its key Cathedral City cheese product “into new international markets as well as deepen its penetration into existing domestic channels”.
He added: “Innovation continues to shape the business and we understand the importance of staying ahead of the market and ensuring we are meeting consumers’ needs.”
Of most significance to our Income Portfolio is that the interim dividend was increased by 2pc to 6.4p per share.