The Investment Column: More red faces at Prudential, but the life insurer has little to apologise for

On paper, DS Smith looks vulnerable to the rising cost of raw materials; Growth prospects limited at lacklustre CI Traders
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The Independent Online

Humility is not a characteristic one often finds in the UK boardroom. But since angering investors with a surprise £1bn rights issue last October, Prudential's board appears to be have been on a constant diet of humble pie.

Humility is not a characteristic one often finds in the UK boardroom. But since angering investors with a surprise £1bn rights issue last October, Prudential's board appears to be have been on a constant diet of humble pie.

Yesterday, it was the turn of Mark Wood, the UK division's chief executive, to accept the blame for miscommunicating the company's strategy. He blushed bright red as he conceded the buck should probably stop with him. Fortunately for Mr Wood, he has not been forced to pay for the mistakes with his job, unlike Jonathan Bloomer, the ousted chief executive, and Geraldine Davies, sacked as head of communications.

The issue of communication aside, Prudential actually has very little to apologise for. Since raising the money to expand its UK business, sales have gone from strength to strength, with most investors now reluctantly conceding that the cash call was in fact the right move to make to capitalise on a return to saving by the UK public.

Reporting first-quarter results yesterday, Prudential showed it is already ahead of the pace as it targets 10 per cent sales growth this year. Its US business is also continuing to tick over nicely, generating enough cash to fund its own growth, and the Asian operations are racing towards a similar self-sustaining cash-positive position. The extra money raised for the UK leaves Prudential well positioned ahead of this year's regulatory changes, where it expects to scoop new customers from making its financial products widely available through banks and financial advisers.

When we looked at this stock 12 months ago, things looked very different. The company was dragging its feet over the sale of its 79 per cent stake in Egg, the internet bank, and its UK strategy was confused. Our advice that there would be cheaper times to buy was vindicated in October when the stock fell as low as 386p. Since then, its shares have leapt more than 25 per cent, and are up 7.5 per cent since we put them in The Independent's portfolio of tips for 2005 in the new year.

With the highly respected Mark Tucker - the former head of Pru's Asian operations - taking over as chief executive next month, the company arguably looks in better shape than it has done for a decade.

Although it decided to withdraw from the immediate sale of Egg after failing to receive a suitable offer, it is more than likely that this will be sold over the coming year, with at least part of the proceeds likely to be returned to investors. Buy.

On paper, DS Smith looks vulnerable to the rising cost of raw materials

DS Smith, the paper and packaging business, warns that rising fuel and raw material costs are eating into its results, forcing it to cut costs and raise prices to recover the damage.

Except its customers won't accept all of the price rises, and it is finding it tough to identify cost savings in this labour-intensive industry. It's a bit gloomy.

We had hoped that paper price rises this time last year would be enough and, although they have largely stuck, the rapid rise in crude oil prices, up 39 per cent in a year, has pushed up energy bills and the cost of polymers that are used in its plastic packaging.

A glut of capacity in corrugated board used to produce cardboard boxes and paper in Europe has also depressed prices in this division, which was bolstered by the acquisition of Linpac 13 months ago.

Analysts looked past the statement yesterday that the company's financial year to 30 April will turn out in line with expectations. They cut forecasts for next year.

The 112p per share rights issue to pay for Linpac was, as we said, a no-brainer for existing holders, but we were wrong to recommend buying into the shares at the then price of 191p. Now 153p, off 4p yesterday, they are supported by a 5 per cent dividend yield and the outside chance of a break-up bid, but they are a hold at best.

Growth prospects limited at lacklustre CI Traders

CI Traders dominates the retail and leisure industries of the Channel Islands. It runs the biggest chain of grocers across Jersey and Guernsey, and owns the local brewery and many pubs. On top of that, it runs the Marks & Spencer franchise and is trying to open Guernsey's first casino.

With a decent dividend, it has proved a nice little earner for income investors, but the question is where the growth will come from now. Trading results yesterday were lacklustre, to be honest. Sales growth was below 3 per cent. Pre-tax profits were up 33 per cent, but against a 2004 figure depressed by the write-down of property values.

Only the supermarkets managed any increase in trading profit, and the fizz went out of its drinks-bottling business in France, where profits halved.

Now CI Traders is moving into commercial property, having bought ComProp, a property company controlled by CI Traders' chairman, Tom Scott. (He is the man who, last week, netted £19m for his stake in the Guernsey energy group IEG, which agreed a bid.)

Mr Scott is bullish about the development prospects for the CI Traders portfolio and for commercial property values. But the finance industry, on which Channel Island prosperity is built, is gradually moving elsewhere and authorities are looking to raise taxes, either directly on companies like CI Traders, or on its customers, the shoppers and drinkers.

At 72p the shares are up 20 per cent since we said "hold" last August. Now debt levels are high, and the commercial outlook uncertain. Avoid.

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