No Pain, No Gain: A case for revisiting food despite it going cold

Inter Link Foods, a maker of cakes and pies that once graced the No Pain, No Gain portfolio, has made remarkable progress since it arrived on the Alternative Investment Market (AIM) eight years ago. But its shares are more than a few crumbs short of their peak as an unforgiving stock market takes revenge for a shock profit warning.

There is an enticing argument for never revisiting past successes. Yet Inter Link could be an exception. After all its shares are not so very far from my 2002 selling price and the group appears to have put the events leading to its trading alert firmly behind it.

I descended on Inter Link at 196p; selling at 365p. Since then the shares climbed impressively to 775p and would no doubt have at least brushed 800p if chairman Alwin Thompson had not produced his bombshell which warned that sales in April, normally a busy month, had not achieved expected volume.

The warning sent the price tumbling to 284p; it is now 443.5p. Yet, despite its April shortfall, the annual profits were again a record. The adjusted figure emerged at £8.6m, against £7.3m from sales of £130m (£98.1m). Before the warning Inter Link followers had expected a £9m-plus out-turn which would have compared with £3.8m in 2002.

Inter Link, as an acquisitive and cash hungry company, no doubt likes to concentrate on earnings before interest, tax and amortisation (the over used EBITA). I prefer the "true" pre-tax figure, which last year was £4.4m against £2.7m in 2002. Still whatever the favoured measurement there is no doubt that the group, despite its warning, remains on a roll.

Yet, reflecting the stock market's antipathy to unpleasant surprises, the shares are undervalued. Like any high-flying star that misbehaves Inter Link has suffered brutal punishment. And it will be some time before investors are prepared to forget and forgive. But I suspect Inter Link, providing it has exhausted its supply of mishaps, will eventually regain its more exotic share status. So now could be a rewarding time to buy into a group that from a standing start 12 years ago has, swallowing quite a few businesses on the way, become Britain's second largest cake maker and is trying its luck in Europe.

I gave Inter Link and support services group Mears the old heave-ho just before I departed on an extended holiday. Both had performed magnificently but looked vulnerable as the stock market experienced one of its periodic freak-outs. I felt it unwise to leave what were substantial profits locked in until I returned.

Mears was even more successful than Inter Link. I had climbed aboard at 23p, although I made the decision at 18p, and sold at 71.5p. The shares have, since I departed, been as high as 325p. They are now 278p.

It has not suffered the sort of setback that so wounded Inter Link. Since 2002, real pre-tax profits have soared from £3.6m to £9.8m last year. Although the chairman Bob Holt has accomplished the occasional takeover much of Mears' growth has been self propelled as it extended its core interests in the booming market for providing support services for social housing. This week Holt reported interim profits had advanced to £5.3m (£4.3m) and the City is looking for annual profits of £12.5m.

It seems to me that Mears shares, although a good long-term investment, may nowadays be a little too rich for the portfolio. Probably much of their outstanding exuberance is now behind them although I would not dissuade any buy and hold investor from climbing on board. Indeed, my willingness to consider Inter Link's portfolio return is solely due to its fall from grace.

Holt is also the head honcho at Wyatt, an on-line support group. The shares are causing me anxiety. The portfolio moved in at 27.5p; the price is now 8.5p. Figures are due next month and there seems little point in baling out before they arrive. Losses are expected but it is the accompanying trading statement that is more important. Besides, detailing the performance of its internet operations it should offer more information about its fledgling - and tantalisingly promising - drug testing system.

Like many tiddlers it takes very little activity to influence the price. On one day recently, share volume was put at 2,000, yet the price fell 3p. It would, therefore, not take much action to get the shares back to a more acceptable level.

cash@independent.co.uk