When the Quaker-founded, Friends Provident in Dorking , Surrey, announced plans to demutualise and float back in 2000, many were sceptical the insurer would list without being bought. It was too small and too parochial to compete with the big Norwich Unions and Legal & Generals of this world, so it was said.
Friends has proved remarkably resilient as a plc, especially through two terrible years for life insurers. There is more than five times enough capital in the group to cover a doomsday scenario of collapsing stock markets, property values, bond yields and interest rates. This should dismiss any fears over its capital strength.
Its capital demands are less than other life insurers because its with-profits fund is run as a mutual fund for policyholders alone. Its assets and liabilities are mostly self-contained and with-profits, a capital-intensive product, is now only 10 per cent of its new sales - and falling. Friends' is focusing on company pension schemes and protection products. Friends sales were up 14 per cent in 2003 and it has squeezed itself into the top 10 of providers. The UK savings market is a tough one, though, racked by nervous consumers and heavy regulation. Friends' reliance on the UK limits its growth prospects, but its shares are a solid hold.
It has been three years since Persimmon gobbled up Beazer and the success of that acquisition - which doubled the housebuilder's size - means that John White, Persimmon's chief executive, is ready to do it all over again. There are plenty of juicy targets, but even without acquisitions, the company has plenty of room to grow organically. The state of the housing market does not seem to worry any of the housebuilders, with Persimmon pointing to a healthy slowdown in price inflation this year. Buy.
ISIS ASSET MANAGEMENT
With stock markets rebounding, things have looked better of late for the fund management group. Isis has big ambitions to be a top five player by 2009: it is now in the number 10 slot, and is keen to get there through additional acquisitions. Outsourcing its administrative work last year was a shrewd cost-cutting move and gives it a good platform for the future. Hold.
It is barely a couple of months since we last wrote on Psion, but look what's happened since. We were right to advise avoiding the stock, given that the shares lost a quarter of their value when it said it would sell its stake in Symbian, the mobile phone technology that was perceived as the bulk of the value in the company. Psion will be left with its Teklogix business. Teklogix gadgets are used to input stock data in warehouses. The business is interesting and Psion will be cash rich. Buy.
D S SMITH
The worry for investors in D S Smith, the UK's biggest manufacturer of paper, is that profits in this industry are, well, paper thin. The acquisition of a cardboard company has stiffened shareholders' resolve. Corrugated packaging for the transport of consumer goods, especially to supermarkets, is less sensitive. The deal coincides with a strengthening of the paper price and now is a good moment for investors to buy into this undervalued company.
Exel transports goods for customers such as Marks & Spencer under contracts that typically run for four years. It reckons about 75 to 85 per cent of its customers renew their business, while the company also managed to bring in an impressive £450m of new contracts last year. The major bleak spot is currency, and if the dollar exchange rate stays at current levels, the hit to profits will rise dramatically this year. Hold.
After a year that saw the Britannic Group scrap its dividend, close its life insurance business and sell its mortgage division, the company's future has looked questionable. But the drastic tactics paid off. The life business may be closed, but it is now a steady form of income that more than supports the dividend. This will yield 5 per cent in 2004, with good prospects for growth in the pay-out, perhaps as much as 9 per cent a year. For income investors, the shares offer a reasonable deal.
Oxford BioMedica is working on science so new, so exciting that Cancer Research UK and the US National Cancer Institute are bankrolling big human trials of its new drugs. If they work, OXB could be sitting on a goldmine. The breadth of the portfolio of potential drugs means OXB is at least a prolific generator of news, which ultimately drives share prices in this highly speculative sector.
Punters who followed our tip and had a flutter on William Hill's shares at flotation should be smiling. Relaxed betting rules have allowed bookies to put Fixed Odds Betting Terminals in their shops. These terminals are hi-tech slot machines, allowing punters to play roulette while waiting for the next horse race to start. The William Hill brand has also helped draw in customers for online betting. There is still time for investors to pile on for the final furlong of growth.
Mowlem, the construction group, has won plaudits for its work through the Private Finance Initiative. It is also expanding as a building maintenance contractor and as one of the biggest cleaning firms. This is low margin work, though, and the uncertainty over restructuring charges this year means Mowlem shares will not soon narrow the valuation gap with their peers. Avoid.
The outlook for Kidde is rosier than it has been since the fire safety group was demerged from the old Williams conglomerate in 2000. Spares for fire safety systems in civil aircraft should pick up this year. A buoyant US economy should also encourage investment in factories, where alarms, sprinklers et cetera are required by law. Recent debt reduction also means Kidde can pick up the pace of acquisitions. Hold.
Serco on schedule for sustained growth
Serco operates an array of transport services on behalf of the public sector, including London's Docklands Light Railway and Manchester's tram system, as well as military installations, government testing laboratories, local education authorities and office and business park management for the private sector.
Since its flotation in 1988, the company has consistently delivered annual increases in turnover and profits. Last year was no exception and the City has long been impressed by the company's virtues of reliability and transparency. But can the good times continue at the current rates of growth?
First, the fact that Serco bids for contracts to operate facilities means its forward earnings potential can be accurately tracked. The company is sitting on an order book worth a record £10.3bn, roughly equal to seven years' turnover at 2003 levels. These are contracts that have been signed, with funding agreed by customers, and which will hit the top line in coming years. Not only that, but the company is actively bidding for an additional £5bn of business, and is currently waiting for an answer on these contracts. Meanwhile it is considering bidding on a further £14bn of business.
When it comes to new business, it aims to win one in every two contracts. It has a 62 per cent success rate. When it comes to renewing contracts, it aims to win 90 per cent. It has a 92 per cent success rate. It is also investing heavily in training to ensure a constant supply of people well-versed in its management techniques. Buy.
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