The Investment Column: Hold Aegis, but watch its new chief

Granny power may not save McCarthy & Stone - Turbulent times ahead for insurer Goshawk
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The Independent Online

Aegis, the media buying and market research group, ticked all the right boxes yesterday when it announced annual results for 2004.

Aegis, the media buying and market research group, ticked all the right boxes yesterday when it announced annual results for 2004.

It was another good performance from the company, adding to a five-year track record of revenue and dividend growth, despite the worst advertising recession in memory.

That slump is over and 2005 looks like being another strong year, adding to 2004's 15.1 per cent increase in revenue to £747m and a pre-tax profit figure of £63.9m compared to 2003's £48m. The dividend has been raised to 1.45p a share and like-for-like revenue growth was up 8.4 per cent. All signals seem to be pointing in the right direction. However, there is one big difference between the Aegis that we urged investors to back at its interims in September when the shares were 92.75p - they closed yesterday at 105.25p - and the company that filed its full year results yesterday.

That is the absence of Doug Flynn as chief executive and the presence in that particular chair of Robert Lerwill, previously a non-executive of Aegis who has stepped into the hot seat following Mr Flynn's decision to move to Rentokil Initial.

Mr Lerwill has inherited a company in good nick. Mr Flynn's legacy is a company that has invested sensibly with a strategy in media buying that makes the most of its independence. None of this, Mr Lerwill reassured yesterday, is going to change. Shrewd media analysts, such as the team at Numis Securities, reckoned Mr Lerwill gave an "assured" first presentation - and so he should have, given the sparkling numbers Mr Flynn left him to read out.

Although he doesn't like people mentioning it, Mr Lerwill was previously a senior member of the management team that brought Cable & Wireless to its knees. This casts a reasonable doubt over his abilities. The fundamental strengths of Aegis have not changed, so investors should hold their shares. However, it is probably worth waiting to see how Mr Lerwill performs before adding to holdings.

Granny power may not save McCarthy & Stone

Elderly widows are McCarthy & Stone's bread and butter. The specialist retirement home builder even has a special "grannyometer" to work out how many oldies might buy one of its flats in any given area.

Its formula, of building blocks of retirement flats complete with all mod cons, has been a licence to print money over the past decade. And with the population ageing faster than you can say "cold cream", the company is confident of another satisfactory year, according to yesterday's trading statement.

Despite the challenging housing market, the group boosted unit sales by 16 per cent to 792 during the half year to 28 February. Average selling prices soared 15 per cent to £164,000. It is carrying forward a similar level of anticipated sales as this time last year. That's good, but not quite good enough to stop the shares from falling 18.5p yesterday to 674p.

What worries investors is the fear that the number of housing transactions will continue heading south. The danger for McCarthy & Stone is that, unlike most house builders, it is more operationally geared to a drop off in activity because it has high margins. It makes 45p on every £1 profit, against rivals' 20p. Because its customers are trading down, a weaker housing market is also a risk because people will sit on their existing properties, rather than selling up and buying one of McCarthy & Stone's granny flats.

Its shares have soared one-fifth since this column advised hanging on to them a year ago. But with a real risk that transaction volumes will slow, investors should lock in gains.

Turbulent times ahead for insurer Goshawk

A spate of natural disasters made 2004 a bad year for insurers. Goshawk, the Lloyd's of London insurer, paid out $40m (£21m) related to the four hurricanes and 10 typhoons that hit Florida, the Caribbean, the Gulf of Mexico and Japan last year. That led to a $13m second-half loss that wiped out first-half profits and resulted in an annual deficit of $3m, reported yesterday.

That is better than the $108m loss for 2003, when Lloyd's of London stepped in to order the closure of Goshawk's syndicate 102 after heavy losses. Its chief executive and underwriting director resigned. Goshawk was also a lead insurer on a $10m policy for the Columbia space shuttle, which crashed in 2003.

Paul Spencer, the chairman, said he was disappointed the group's latest strategy had not produced a positive return in its first year. The insurer is now focusing on its small marine and property reinsurance operation in Bermuda, which it has rebranded as Rosemont Re.

Recent takeover talk has died down, further undermining the shares, which were down 0.6 per cent at 40.5p yesterday. Goshawk will not be paying a dividend and its new strategy remains unproven, so this is one to avoid.

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