Scrutineer: Insurers look brighter

Published on Thursday 13 August 2009 20:57

Prudential 529.5p +51.2p

AFTER weak figures posted by insurers Aviva and Legal & General resulted in the pair cutting their dividends, there was rather more positive news from the sector yesterday, when Prudential indicated that it could see a brighter outlook.

So much so that it was able to lift its dividend by 5 per cent while Dutch insurer Aegon announced a 1 billion rights issue that was fully covered by lunchtime.

Aegon will use the cash to partly pay down a 3bn loan from the Dutch government last year. The rapid conclusion of the fund-raising was seen as a sign of confidence in the group's future, though its shares fell due to the dilutive effect of the share issue and a surprise loss.

Loosening government ties seems to be all the rage just now and in itself a sign of renewed optimism that financial groups on both sides of the Atlantic are through the worst. The US banks have been sending cheques to Washington to pay off their state loans and in Britain Lloyds Banking Group is keen to raise money through a rights issue to avoid exposure to the UK government's expensive asset protection scheme.

That said, figures from all the insurers show how tough it has been and their optimism cannot hide the fact that they face some tough trading conditions in the coming months.

Aegon announced a second-quarter loss, largely due to the volatility in stock markets and impairment charges on bad debts in the United States. But its UK business managed to maintain its profitability levels as it switched its product mix to reflect changing demand.

Fewer long-term savers are being compensated by higher-margin annuity business.

The relatively robust figures from Prudential, the last of the big British insurers to declare first-half results, stand up to what departing chief executive Mark Tucker called "challenging market conditions". While he apparently ponders a boardroom role at Chelsea Football Club, he leaves Prudential with a financial position considered to be "very strong".

Shares in all British insurers fell sharply during the first quarter of the year, weighed by concerns that falling stock markets and rising corporate bond defaults might erode their capital reserves, potentially forcing rights issues.

But Prudential's capital position has improved markedly, with a regulatory capital cushion of 3bn as of July 31, up from 1.5bn at the end of 2008.

Even so, shifts in the market place are clearly testing life companies as investors seek out alternative products. Prudential said last year's decision to focus on its most profitable product lines resulted in improved margins across the business. Aegon UK chief executive Otto Thoresen echoed the sentiment.

But neither can hide from sliding sales which have fuelled calls for the industry to consolidate. It was notable, however, that both Pru and Aegon put aside any suggestion that either would sell its UK business to the acquisitive Clive Cowdery's Resolution group, which this week bought Friends Provident and has a list of other potential targets in the life and pensions sector.

That's two of a list running to some 25 companies that we can chalk off, with attention now beginning to focus on Legal & General. Over to you, Tim Breedon.

Asda

SUPERMARKETS appear to be immune to the ravages of recession as they continue to defy the downturn.

They seem to be among the few companies creating jobs in any significant numbers – Sainsbury's announced 1,300 jobs for Scotland last weekend and earlier this week Morrisons said it would be hiring a further 2,000 employees.

Asda, the second-biggest UK chain, yesterday reported a 7.2 per cent hike in second-quarter sales and record customer figures.

The supermarkets also benefit from the recession in so much as they sell more food as people choose to cook at home rather than eat out.

Whatever government measures are imposed on the supermarket giants and however much we claim to resent their uniformity and control of the grocery market, it seems we just cannot get enough of them.

Yet there are words of caution among the growth figures. Judith McKenna, chief financial officer at Asda, warns that consumer spending trends are not on a permanently upward path and that the preference for paying down personal debt and saving more will make the future a little less certain.

Continuing concerns about unemployment will eat into the propensity to splash out on non-essentials which may even erode the growth rate at the big four.

Craig Yeaman of Saracen Fund Managers

ONE TO WATCH

BAE Systems

332.8p +3.2p

Scotsman says BUY

THE stock market has enjoyed its best month in more than six years, with encouraging economic data and better-than-expected corporate earnings from many firms. The FTSE All Share Index rose 8.4 per cent in July but not every company saw its share price appreciate. BAE Systems is one such firm, falling 7.1 per cent in a rising market.

BAE makes defence, security and aerospace systems for use in the air, on land and at sea. Sales of 18.5 billion make it the world's third largest defence group.

The company has clearly been hit by budget concerns in the US and UK and, although spending will come under pressure, it is likely the group will be able to maintain growth at about the 10 per cent level over the next several years.

The UK accounts for just 20 per cent of BAE's sales and the group has been planning for a slowdown in spending in its more mature markets.

BAE operates across a broad geographical base with six key markets (US, UK, Australia, Saudi Arabia, Sweden and South Africa) and is looking to establish new markets in growth regions. India looks attractive and its government recently announced that defence spending would grow by 25 per cent this year.

Having been left behind in the recent market rally, BAE is trading on just 7.4 x 2009 estimated earnings, falling to 6.8 x 2010. In addition to an undemanding rating, the company is yielding 5 per cent and has made it known it is possible to increase the dividend ahead of earnings growth. BAE also has a strong balance sheet, and is forecast to have more than 500 million of net cash at the end of next year. As the stock market looks beyond more expensive, cyclical companies, stocks such as BAE should see more buying interest.

&#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.

Venture shares down after Centrica extends bid offer

SCOTS STOCKS

CENTRICA last night extended its offer for Aberdeen-based oil company Venture Production after failing to gain control of a majority of the group's shares.

The British Gas owner has launched a hostile 1.3 billion bid, rejected by Venture.

Centrica has extended its bid until 28 August after receiving approval from shareholders representing 10.9 per cent of Venture's capital. It now controls just over 40 per cent of the group.

The level of acceptances is not a sign that the bid is likely to fail, with institutional investors expected to wait until the last moment before deciding. The announcement came after the market closed. Earlier Venture shares had closed 2.5p lower at 838p, below Centrica's 845p bid.

Speculation continued yesterday that RWE might bid for Dana Petroleum, after the German utility admitted it was likely to miss its target of doubling oil and gas production by 2013.

Analysts at Evolution Securities said Aberdeen-based Dana, which has unexplored gas prospects adjacent to RWE's in offshore Egypt, would help it hit the target. Shares in Dana closed up 18p at 1,412p.

Industrial-related companies rose, boosted by a recovery in commodity prices. Weir Group, the Glasgow-based pump group, which rose on broker upgrades on Wednesday, climbed a further 19p to 623.5p yesterday.

Aggreko, which provides temporary power generators, climbed 18p to 580p, but Scottish & Southern Energy, the Perth-based utility, was unchanged on 1,121p, despite picking up a Welsh power station for 27 million.

On Aim, oil and gas explorer Bowleven eased back from Wednesday's gains, when it announced a farm-out deal in Cameroon. Shares closed 3p lower at 91p yesterday.

Hot Tuna nets 1m through share placing

SMALL BUT BEAUTIFUL

HOT Tuna, the Aim-listed fashion brand, yesterday raised more than 1 million through a share placing.

The surf wear specialist placed 370 million new shares, raising 1.11m.

Hot Tuna said the funds would be used to increase its range of clothes in existing markets and also to fund an expansion into new markets.

Some of the money will also be used for general working capital, the board said.

Executive director Geoff O'Connell was also yesterday appointed as Hot Tuna's new chief executive, replacing Niels Juul, who left in April.

O'Connell joined the company in 2005 as general manager of its European business. He later oversaw the restructuring of Hot Tuna's Australian operations.

Hot Tuna said O'Connell "has a wealth of experience in the retail sector in both the UK and Australia".

He said: "Now that the restructuring is complete and the financing in place we are very excited by the growth potential of the brand in all markets and I look forward to taking the company forward at this positive time."

In June, Hot Tuna – which has a market cap of about 1.4m – said its market remained difficult.