The Investment Column: Reverse profit warnings are all the rage in insurance

Keller can engineer a success built on solid foundations in the US; Soco is in fine fettle but shares are high enough
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The Independent Online

But the outlook from here still remains uncertain. While insurers have been cashing in due to a low level of natural disasters in the first six months of the year, combined with a strong resurgence in equity markets, there is no guarantee that either of these factors will persist into the second half of the year.

Although last autumn's hurricane season was the most costly ever for the insurance industry, meteorologists predict that such severe storm seasons may become the norm in the years ahead. With premiums continuing to soften, putting pressures on profit margins, it remains perfectly plausible that the same insurers which are enjoying the calm at the moment may be in dire straits if there is a heavy storm season this autumn. Such are the risks of investing in the insurance sector.

With premiums softening, the year ahead is likely to be tougher. However, one other factor continues to threaten to turn the sector upside down - consolidation. With a market value of more than £500m, Wellington is one of the larger players and is more likely to play the role of acquisitor than target. However, some of the bigger players in the sector would have the firepower to buy Wellington if the will was there.

Nevertheless, for new investors keen on exploiting the potential consolidation play, companies such as Chaucer, which has already played both target and acquirer over the last year, may prove a better choice.

When we last looked at Wellington almost a year ago, we advised investors to buy - and those who followed our advice will have made more than 30 per cent since then. But with the company now trading on a more reasonable multiple - of almost 10 times this year's predicted earnings - and the yield now much less attractive, there is not so much to commend the stock.

For existing investors, who have enjoyed a good run over the past 12 months, the risks of holding on appear to be quickly outweighing the potential upside. At 109p, take profits.

Keller can engineer a success built on solid foundations in the US

Houses, office blocks, bridges and other man-made structures need good foundations. That is where Keller comes in. It is a British engineering company which is a world leader in its specialist field.

The company secures the ground for construction and it also lays the foundations, by putting down concrete slabs or drilling deep holes that are then filled with various materials.

The work is generally pretty quick, so it will carry out many more jobs each year than a typical contractor. Yesterday, it reported that conditions were good, especially in its most important market, the US.

Pre-tax profits were up 39 per cent for the first half to £15.6m, on turnover that grew 14 per cent to £335m.

The US construction market continues to boom and, unlike the UK, the housing sector remains robust. And trading is improving for Keller elsewhere in the world. Its UK business should improve as a number of new contracts kick off in the second half.

Keller has two businesses in the UK and one of these is involved in a different activity to the rest of the group. It is a refurbishment contractor, called Makers, involved in the social housing market, mostly in London. There had been delays in getting work started, as the interval between winning preferred contractor status and getting on site increased. Keller says that its market remains strong.

Keller's work is not really technologically sophisticated, but as the market leader it is able to offer customers the same techniques worldwide. It says that it is just better and bigger than competitors. The company's shares, at 360.5p, are not on a demanding rating. The highly rated management team and Keller's competitive position make the shares a buy.

Soco is in fine fettle but shares are high enough

Soco International, the oil exploration group, had good news for investors yesterday. Results from an exploration well offshore in Vietnam, in Block 16-1 on the Te Giac Trang structure, had tested water free at a rate of 9,432 barrels of oil equivalent per day. It was all the more pleasing as no previous well had been drilled in this structure. "This kind of low rate is as good as it gets," the deputy chief executive Roger Cagle said.

The company reckons that the 16-1 prospect, in which it has a 28.5 per cent stake, has reserves of some 100-200 million barrels of oil. That is on top of the 9-2 block, where 150-200 million barrels are estimated.

Soco says it has special expertise in certain types of geological structures - "basement reservoirs" - which are not easy to work with. The company has pulled off the same trick in a similar type of reservoir in Yemen, where the wells are in production. The 9-2 block in Vietnam should be in production in the first quarter of 2007, while block 16-2 will not come on until at least the end of that year.

Soco is now turning its attention to new areas, west Africa in particular. It looks for prospects that are not hugely expensive to drill, so that it is not betting its future on the results.

Its results so far have removed a lot of the risk from the shares and there is potential upside from further exploration wells that are yet to be drilled. But Soco shares have had a very good run and after a 12 per cent gain yesterday to 781p, the stock is high enough.

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