The Week In Review: Old Mutual's new friend makes the shares look cheap
Saturday 21 January 2006
Old Mutual, the South African financial services group, has long suffered from an image problem. London investors remained reluctant to give the company their full backing until it made the acquisition it had promised in the UK.
When Jim Sutcliffe, the towering chief executive, came on board in 2001, he was all too aware of this pressure. Five years and a lot of fruitless talks later, Sutcliffe has finally come good on his word - pushing ahead with the purchase of Skandia, the Swedish life insurer, in spite of fierce opposition from many of the company's shareholders.
The result, it became clear this week, is a 70 per cent stake in a group with an extremely competitive position in the UK market, complementing Old Mutual's existing businesses, plus exposure to Scandinavia, Latin America and Asia.
The acquisition will boost earnings from an early stage. There are also some synergies to be had in the UK, where the companies both own prominent businesses serving financial advisers. In the weeks since the deal has looked like a certainty, the company's shares have already climbed by a third, but they still look cheap at less than 10 times the earnings we expect for 2005. Buy.
Last year's acquisition of a US rival catapulted Gyrus, a specialist in making equipment for keyhole surgery, into the UK's No 2 spot behind Smith & Nephew. Gyrus had been flirting with American Cystoscope Makers Inc (ACMI) for more than five years, and finally tied the knot in June. Last week's trading update painted a rosy picture.
The shares have far outperformed the health sector over the past year, but we believe they have further to go in the long term. Aside from Gyrus's growth opportunities, the prospect of new North American investors should support the stock. The shares are a buy.
Six months ago, Monsoon shareholders were put on stand-by for a possible takeover bid from the retailer's chairman himself, Peter Simon (Simon's family controls three-quarters of the stock). Since then, the stock has soared almost 100p to more than £4. But because even Monsoon is finding the going tough - interim pre-tax profits fell by 9 per cent - Simon can't figure out how much the company is worth. He isn't prepared to offer a premium to the current 416.5p, but he knows that the hedge funds won't accept less. Hence the impasse. That, with the downturn in trading, makes the stock a sell.
Not only did the demise of the sports clothing retailer All:sports last year take out a direct rival to John David Group's JD Sports chain, but JD also snapped up a number of All:sports stores.
JD is trying to set itself apart from rivals such as JJB Sports and Sportsworld by selling fashionable sportswear and offering exclusive product lines, such as Puma, although its stand-alone fashion stores, including RD Scott, performed poorly.
Takeover speculation has swirled since Pentland, the owner of the Speedo brand, bought a 45 per cent stake in the company last summer. Valued at under 10 times next year's earnings, the shares are worth holding.
It may be less the Thundering Herd and more a trotting pony, but Arbuthnot is a small British bank that is finding some form.
Its investment banking business is doing nicely in a record year for the industry. Arbuthnot shares are yielding 6 per cent, against just 2 per cent by similar companies. With Henry Angest, the chairman and chief executive, owning almost 49 per cent of the company, that yield looks relatively safe. Arbuthnot may be worth a flutter.
ST JAMES'S PLACE CAPITAL
Business is booming at the upmarket wealth manager St James's Place Capital in the run up to the biggest shake-up of Britain's pension system in almost 20 years in April. Overall, new business grew by a quarter in 2005 as demand for pensions and investments offset dwindling sales of mortgage-related protection policies in a subdued housing market. The upbeat news spurred the shares 11p to 293.5p on Thursday, their highest since spring 2002. That looks pretty fully valued, trading at 1.8 times embedded value and yielding little more than 1 per cent. Despite the healthy sales performance and strong positioning ahead of the pension changes, and reassurances over growth prospects, investors may do better elsewhere.
Austin Reed, the up-market fashion chain, had a good Christmas - a relief for investors, who have endured a tough few months. The main worry for the company remains the decline of its Country Casuals (CC) brand, but margins here are improving and the management says sales will follow this year.
The valuation of the group still looks demanding, however. Although the recent collapse in its share price makes it a potential takeover target, it is hard to recommend it to new investors at its current price. Hold.
Make sure to keep hold of your South African brew
Shares in SABMiller have enjoyed a great run over the past three years as the company rose rapidly in the league table of global brewers. The transformational deal that put SAB on the map was America's Miller, which was bought four years ago, whereupon the company's name changed from South African Breweries.
Last week's trading update on beer volumes revealed a slowdown in the third quarter in South Africa and the US. Flat volumes in South Africa after 3 per cent growth in the first half were a disappointment in what is SAB's peak season there - due to rain spoiling the South African summer.
While still SAB's largest market, South Africa accounts for only one-third of group profits - the aggressive marketing of Miller in the US, with the flagship Miller Lite brand, has rejuvenated it so it makes up one-fifth of earnings now.
Recently SAB has been hit by a US price war after the market leader Anheuser slashed the cost of beer. Emerging markets are making up for the difficult US market, though.
SAB Miller shares have seen a healthy start to the year, partly on the back of a strong rand, and now trade in line with the sector. Given the group's growth prospects, the stock is a long-term hold.
The above are recommendations from the daily Investment Column
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