The Investment Column: Follow the Pied Piper to Amlin as rise in premiums makes it a buy

Dig into Dobbies Garden Centres as sector looks set to blossom; Underperforming McAlpine is a hold
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When this column last looked at Amlin, the Lloyd's of London insurer, almost six months ago, we advised investors to hold on for a better time to buy. A few days later, what turned out to be the worst hurricane season in history got under way, hammering the shares of reinsurers who were heavily exposed to the catastrophes - and eventually boosting the prices of underwriters such as Amlin, who stood to gain from the subsequent rise in premiums.

In the months since, Amlin has successfully raised £224m through a rights issue, set up a new Bermuda operation to take advantage of the soaring rates in the US catastrophe insurance market, and has seen its share price rise by almost 50 per cent.

After such a rally, deciding whether it is too late to join the party remains a tough decision. On the downside, the group is now that much more exposed to future floods and hurricanes in the US - and could stand to take a much bigger hit if this year's hurricane season proves as, or more, severe than last. At the same time, premiums in some of these markets are now significantly higher - and by the laws of probability, the US is unlikely to see a third heavy storm season in a row.

Although the recent share price rally has certainly taken some of the shine off the potential upside, Amlin's shares still look good value at just 11 times last year's predicted earnings, and the dividend yield of 3.5 per cent should not be sniffed at. Furthermore, major world markets are continuing to rise, helping the group's investment performance.

Although insurance stocks are not for the faint-hearted, especially in an age where shocks such as natural disasters and terrorist attacks seem to be ever more common, Amlin remains the best of the bunch. With the rise in premiums, this is a buy.

Dig into Dobbies Garden Centres as sector looks set to blossom

Dobbies Garden Centres put in a disappointing performance over the Christmas period and blamed it on the simple fact that consumers are spending less. Like-for-like sales fell 2.2 per cent in the nine weeks to 1 January. Total sales, including new and refurbished stores, rose 10.7 per cent.

There is a risk that next year's numbers will also disappoint, but it's early days and the crucial spring/summer period, when Dobbies makes most of its money, is still to come. The group has tried to turn its garden centres into fun places for the whole family, installing mazes, restaurants and butterfly and insect centres.

The Edinburgh-based firm, which generates two-thirds of its sales in Scotland, runs 17 garden centres but has plans to open five more. All of its sites are freehold property, giving it a solid asset base from which to expand. Its shares benefited recently from City speculation that Dobbies could be the next bid target after its larger rival Wyevale confirmed it had received a number of approaches, though takeover talks have now ended.

Dobbies, at 542.5p, is trading at a little more than14 times forward earnings. For a sector that is likely to blossom over the long term, that is not overly expensive. Buy.

Underperforming McAlpine is a hold

The world of outsourced property services is the most exciting part of Alfred McAlpine, once a humble housebuilding and construction group. A trading update yesterday said that the company would meet City expectations.

The company still gets its hands dirty building things, such as roads in its capital projects division, but it sold off its housing business some time ago. The third leg of the group is an infrastructure services business for utilities.

The higher-growth business services arm, which provides cleaning and maintenance for commercial property owners, has enjoyed good contract wins. It is the preferred bidder on two other, major, facilities management contracts.

The capital projects division is not considered a growth business. But McAlpine maintains there are considerable synergies with its business services arm. The two divisions can pass business to each other.

The services McAlpine provides to utilities have had a tough time, partly because water companies were holding back pending a regulatory review.

McAlpine has a fat order book worth £3.3bn, giving visibility of future earnings. But as Numis Securities points out, it has a history of underperformance. At 385.25p, it's a hold.

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