Prudence lives at the Pru

Published on Friday 20 February 2009 20:17

SCRUTINEER

Prudential

285p +28.5p

Rentokil

44.25p -0.75p

AFTER the collapse of the banks, the unforgiving City spotlight has fallen on the potential vulnerability of their more staid cousins, the insurers.

That triggered marked share price volatility in the sector, but insurance companies have been alert to the danger.

They have moved quickly to reassure the market before any sustained run on their shares makes feared financial weakness on their balance sheets a self-fulfilling prophecy.

Prudential raised the bar to a level other UK insurers will find hard to manage yesterday. Freeing up an extra 800 million of capital from the sale of its operations in Taiwan, Prudential now has a minimum 2.5 billion capital cushion to meet its regulatory needs and pay all its liabilities.

That is well ahead of its rivals. Legal & General, whose shares had previously lost about a third in value in a month because of capital worries, reassured the market earlier this week that it was sitting on a 1.6bn surplus. Aviva has 2bn.

And if any more evidence was needed as to how seriously the financial sector views the economic situation, both the Pru and L&G have said explicitly that they have looked at corporate credit default rates from the Great Depression in deciding their potential capital needs.

And how bad did it get back in the Depression? Credit rating agency Moody's says corporate default rates surged 15 per cent at the nadir in 1932.

One also senses the hand of the Financial Services Authority here. Nobody is actually forecasting things will get as bad in the next decade as they did in the Thirties.

Governments and regulators have moved far faster than their counterparts all those decades ago, with far less of a laissez-faire approach than pertained at that time. But you hope for the best and plan for the worst.

It is reassuring that financial companies are alive to unnerving worst-case scenarios.

Prudential's shares responded with an 10 per cent jump yesterday that was not solely relief at the company's undeniably impressive capital surplus.

Sales at the company in 2008 came in ahead of expectations. That included UK sales ahead 4 per cent even if Q4 showed a sharp 35 per cent fall as recessionary gloom took hold.

Even with that caveat, however, the Pru looks surprisingly good given a very testing trading backcloth.

IF WE are going to put out the bunting on the latest UK retail figures we should be sparing with it.

Yes, the 0.7 per cent rise in sales in January disclosed by the Office for National Statistics was welcome, particularly given that the City consensus forecast was for a 0.1 per cent fall.

But January is a capricious month for retailers. Consumers take advantage of January sales to spend more freely, part of the reason December often proves an anti-climax for some retailers.

There is also anecdotal evidence that, although January high street spending started off robustly, it became more muted as the sales petered out. Many economists still forecast retail sales will fall 3.5 per cent in 2008, excluding inflation.

The continuing performance of the sector in February and March will indicate better whether we are seeing a nascent high street recovery or not.

APAIN for long-suffering shareholders, but still probably the right thing to do. On-the-ropes services group Rentokil – rat-catching to plant rental – has scrapped its final divi to preserve cash while the jury remains out on its recovery programme under new chief executive Alan Brown and chairman John McAdam.

Rentokil was led adrift by badly-digested acquisitions, leading to four profit warnings since June 2007.

That has seen the shares given a pasting, while the company also revealed yesterday that profits halved in 2008.

Brown wants to simplify the business, and continuing asset sales must be a possibility as the group sits on debt of 1.4bn.

Turnaround will be measured over at least two to three years.

In that context, Rentokil's decision to retain all the capital it can is prudent.

Investors who have stuck with the shares (many haven't) are long-term players because they know the score.

Operational improvements rather than flatter-to-deceive financial sweeteners are rightly the priority.

Bryan Johnston of Bell Lawrie

ONE TO WATCH

Vantis

56p -0.5p

Scotsman says BUY

VANTIS provides professional and business services to clients in the UK and overseas. Its segments include business and tax advisory, recovery services and consultancy services.

Aim has been especially hard hit by the turmoil over the past 18 months or so as investors have abandoned smaller companies. As a result, Vantis's share price is a far cry from the 250p peak it hit in March 2007. The recent interim results suggests this might be an opportunity for more adventurous souls.

Over the first six months of the current trading year, Vantis's pre-tax profits fell from about 6 million to 4.5m. The market was also not amused by the reduction in the dividend. It may be worth focussing instead on the accompanying statement than fretting over the figures. The chairman's comments were robust: "Business recovery is thriving due to an increasingly tough economic environment and higher levels of insolvency, whilst our business advisory service has held up well."

Unsurprisingly, perhaps, the group's consultancy business did slip back over the period, reflecting the challenges facing its core client base, but its services may be increasingly in demand in the coming days as its clients try to adjust to the trading challenges by which they are surrounded, whilst ensuring they are in a position to capitalise on the eventual upturn.

Equity investment at any time is only for the patient, and particularly nowadays, and no-one should commit funds into ordinary shares on which they might have a claim within the next couple of years. However, Vantis does look an example of a stock whose fortunes are highly geared to an eventual economic revival.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

RBS 'embroiled in Merckle debt'

RUMOUR OF THE DAY

THIRTY banks – including Royal Bank of Scotland – lent German industrialist Adolf Merckle 5 billion (4.4bn) before he took his own life, sources yesterday claimed.

Some of the cash borrowed is in the form of short-term debt that needs to be repaid soon, the sources added.

Merckle threw himself in front of a train last month, leaving behind an empire spanning cement production to generic drugs. His family have been forced to sell vast swathes of his empire to repay the debts, the sources yesterday said.

His loans – mainly in his VEM investment vehicle – had been a closely guarded secret.

Merckle, who once hosted German chancellor Angela Merkel and former US President George W Bush at a castle he owned, was known as a "careful businessman".

Invocas shares continue steady rise

SCOTS STOCKS

INVOCAS, the Edinburgh-based debt management group, soared 11p, or 27 per cent, to 51p – above the level its shares reached last month when it announced it was in takeover talks.

Shares plunged after the talks were aborted but have steadily recovered on expectations that the economic situation will be boosting its trading. Shares in the Aim-listed company are now trading at the highest level since last October.

Devro continues to rise on the back of this week's better-than-expected results, where it reported a strong rise in profits and sales. The sausage skin company rose 1.25p to 92p, closing at the highest level in 14 months.

Edinburgh-based Melrose Resources dropped despite revealing that production in 2008 had been slightly higher than forecast, and that it will focus on projects that will create value in the short to medium term. But weak crude prices meant shares dropped 6.3 per cent to 181.5p.

Elsewhere in the oil exploration sector, Dana Petroleum dropped 4 per cent, or 38.5p, to 927p as crude prices eased, while Venture Production fell 4.9 per cent to 494.5p and Bowleven slipped 2p to 36.25p.

Optos rose a quarter pence to 45.25p ahead of its AGM next week where new chief executive Roy Davis is expected to outline his plans for the company.

Craneware, the Aim-listed medical billing software company, shed half a penny to 221p, ahead of its interim results on Monday, where it is expected to report a strong rise in sales and profits.

Insulation company Superglass, another of Scotland's recent flotations, also shed half a penny, closing at 20p.

Sinclair Pharma's double deal helps boost its shares

SMALL BUT BEAUTIFUL

SHARES in Sinclair Pharma soared by as much as one-fifth in morning trading yesterday after the firm signed a pair of deals with fellow drugs group BMG Pharma.

Sinclair has licensed a range of early stage gynaecology technologies to BMG, a privately-owned US company. The deal is worth 3.5 million (3.1m) to Sinclair.

In the second agreement, Sinclair will license skin anti-infection products from BMG, at a cost of 4.1m.

Sinclair said: "The balance of 600,000 is payable by Sinclair to BMG in instalments, of which a small part will fall in this financial year and the balance in the next financial year."

Dr Michael Flynn, chief executive of Sinclair, added: "This innovative, mutually beneficial collaboration with BMG Pharma will present significant opportunities over the next few years."

Sinclair was founded in 1971 to sell and market generic and branded drugs but switched focus in 2000 following a management buyout to concentrate on acquiring companies and products.

The company floated on Aim in 2003 and switched to the main market in 2007. Shares closed yesterday at 29.75p – 12.3 per cent higher.