Shares: Find risk or reward in a collection of shells

ONE OF the riskier but potentially most rewarding types of shares are those in 'shell' investments. The shell is usually a company that has fallen on hard times to the extent that its main value lies in having a stock market listing. A skilful and well-connected management team, especially if it has the 'placing power' of a powerful stockbroker or merchant bank behind it, can work wonders with a shell.

Timing is also important. Brian McGowan, one of the team who revitalised the former shell company Williams Holdings to move its shares among the best performers of the 1980s, has always conceded that a key factor in the company's success was that the team started from a near economic low-point in 1982. Conditions are similar today, and active management teams are again taking positions. I have picked shares in three companies at an early stage in the revitalisation process which could do well.

Most speculative of the three is arguably Stratagem at 134p, which is being revitalised, rather more painfully, by two former members of Paribas UK's corporate finance department, Bernard Kerrison and Putzi de Margary. Each time they have done a deal the first effect has been to make their problems worse - though they are certainly winning their spurs as problem-solvers, particularly given the recessionary background against which they have been operating.

Their latest deal is the purchase of Harrison Industries, a struggling industrial and domestic doors group. The flood of new shares involved has held the price back during the recent market boom, but the pair are making progress, with last year's profits leaping from pounds 386,000 to pounds 1.2m. The timing looks good and the shell company seems well placed for progress, with other assets such as a minority stake in the UK Dart and Laser boat-making business.

At the earliest stage is a company called Carlisle, which is being rescued by Nigel Wray, best known in financial circles as chairman and leading shareholder of Burford Holdings, a well-run property business that has exploited the property recession to expand its asset base vastly. It has been rewarded with a soaring share price.

Wray started his business career as the editor of a tipsheet, the Fleet Street Letter, which went public and then became the vehicle for the meteoric growth of Michael Green's Carlton Communications. In the process, Wray has become wealthy and proved himself as a remarkable doer of deals.

Anyone who buys the shares at the current 34p is also taking on a commitment to stump up a further 11p in a proposed one-for-one rights issue, but will end up with two shares for every one bought at an ex-rights price of 22.75p.

In addition to the rights issue, Wray is subscribing for shares at 11p a share and should end up with almost 40 per cent of the equity. He will join the board as non-executive chairman, but can be expected to take a powerful interest in Carlisle's future.

The company is also being subjected to a massive cleaning-up operation to set the scene for better times. One subsidiary is going into receivership, the head office is being acquired for pounds 2.35m to cut hefty rental outgoings, and other overheads are being slashed, which will leave the company with pounds 6m in cash, some property including the newly acquired head office, and a commercial agency, Pepper Angliss & Yarwood. There is even a capital reduction to speed up the day when dividend payments can be resumed.

Pepper Angliss is forecast to have lost pounds 770,000 in 1993 but in the last property boom it made profits of several millions, and is expected to return to a useful profit in the current year, reflecting a lower cost base and increased activity in the commercial property market. At 22.75p the relaunched group will be capitalised around pounds 18m, which could be substantially backed by mainly cash assets and the value of a reviving Pepper Angliss. Wray's task will be to build on that with adroit property-related deals. Prospects look promising.

Further down the process of reconstruction is Arild Nerdrum's Caverdale Group, which has been aggressively buying motor dealerships. In the first half of 1993 the group reported a fivefold leap in turnover to pounds 21.6m and turned a pounds 272,000 loss into a profit of pounds 663,000. Full-year profits should come in at pounds 1.4m or more, with more than pounds 2.5m in prospect for 1994.

This is a remarkable turnaround for a company that lost money in 1990, 1991 and 1992. Some City eyebrows were also raised by the presence on the board of youthful members of financial dynasties, Damian Aspinall and James Packer.

The group is following a classic recovery strategy. It has two divisions, the larger being motor retailing, where Nerdrum has moved fast to build a string of dealerships including Citroen, Vauxhall, Volvo, Honda, Jaguar, Range Rover, Mazda and Renault. The first acquisition was made in September 1992 near the absolute nadir of the UK car sales cycle, and the group looks well placed to ride the cycle up, with motor distribution profits set to exceed pounds 2m comfortably in 1994.

The other division, also being expanded by acquisition, is the distribution of industrial consumables, where margins are higher and are being further improved by tighter financial controls. Deals are coming in a flurry, with acquisitions to boost both divisions in September. These are being financed by a placing and open offer at 12.5p which raised pounds 3.2m. Since then a further motor dealership has been bought for pounds 1.65m.

At 16p, the shares have quadrupled from their 1992 low point, but they should have further to go given Nerdrum's long-term ambitions.