The Investment Column: Morgan Stanley raises note of caution for UK life assurers
Car dealer Lookers can accelerate as overall market goes into reverse; Consulting group is only for the brave
Tuesday 09 August 2005
Since the bottom of the bear market, though, the quoted life assurers have doubled in value, while the FTSE 100 is up a more modest two-thirds. Enthusiasts for the sector say that the fire-fighting is over and companies are in rude enough financial health to chase the new business that will inevitably flow as people realise they must save for their future and as confidence in the industry leaks back. This column has been such an enthusiast but, in the interests of balance, we should point you to an interesting piece of analysis on the life assurance sector by Morgan Stanley, the respected investment bank, which flicked on the hazard warning lights yesterday.
With three of the FTSE 100's four major UK life assurers having reported their first-half figures (Aviva, the owner of Norwich Union, reports on Thursday), Morgan Stanley is concerned that competition for customers is growing faster than customers' confidence is returning. And with too many life assurers looking for too much business among too few customers, profits will undoubtedly come under pressure.
The margin declines reported so far have been blamed on falling sales of mortgage protection plans and other insurance, linked to the downturn in the housing market. Although Morgan Stanley thinks the situation could stabilise if the interest rate cut revives the number of housing transactions, there are still too many players expanding in this market, it argues.
And it is concerned that the individual annuity market could also become less profitable. It is also an area where life assurers have expanded, in the expectation of growth linked to an ageing population.
Prudential is the only stock Morgan Stanley recommends at the moment. It is expanding fast in Asia, so it will be affected less by a tougher UK market. Friends Provident and Legal & General, which in effect do all their business in the UK, are given a neutral rating by the bank.
And Morgan Stanley is particularly negative on Aviva ahead of its results. Norwich Union is number one in the UK, so it has most to lose, particularly if the mutually owned Standard Life revives. Its question for Aviva this week: "Where will future earnings growth come from?"
Car dealer Lookers can accelerate as overall market goes into reverse
Take a look at Lookers. The car dealer - concentrated in North-west England and Northern Ireland and focusing on volume car marks such as Vauxhall, Renault and Honda - just did its seventh acquisition in a year. It is buying two Volvo dealerships, a deal notable not for its size (estimated at less than £1.5m) but for the fact that it takes Lookers over the border into Scotland for the first time.
The acquisitions will be increasingly important as the market for new cars turns down. It is expected to fall about 5 per cent this year in line with weaker consumer confidence.
As well as buying growth that cannot be so easily achieved organically, they have also diversified Lookers. It now has a greater proportion of its business in the used car market and FPS, which it bought for £31m a year ago, supplies spare parts. It is highly profitable and could be seen as insurance against a prolonged downturn in car buying, since if people don't buy new cars, they will surely have to repair their increasingly clapped out old ones.
Lookers is on course to make profits (adjusted for goodwill and one-offs) of £18.4m this year, according to its broker. On a multiple of earnings, it is the cheapest car dealer in the sector, which looks a little unfair (although its relatively high level of debt, while not a worry, could be a reason).
Park it in your portfolio.
Consulting group is only for the brave
Management Consulting Group does what it says on the letterhead. Its consultants, in two divisions: Proudfoot, which advises managers on how to implement cost-saving programmes or other organisational changes, and Parson, which suggests new financial controls. Blue-chip clients include BP, Nissan, Warner Bros and Citigroup.
Relative to the global giants of the consulting world, these are small players with a patchy track record. This time last year, Parson was building up to do work connected with the tight new anti-fraud regulations introduced in the US under Sarbanes-Oxley. Management was pleased yesterday that in the six months to 30 June this year, Parson maintaining sales on the previous half-year, despite the US work easing off. Proudfoot, though, has proved unable to fully replace some of the big contracts it was enjoying a year ago.
Management Consulting aims to grow in three ways: by opening new offices across the globe, winning new business from existing offices (and an order book up 30 per cent was a highlight yesterday), and making a big acquisition. Each way, it will be a volatile ride.
We said buy when the shares were 45.75p in 2003, and they have been all over the place since then. At 51.5p yesterday, they are only for the brave.
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