The Investment Column: Royal & SunAlliance now a buy as Haste restructuring pays dividends

Cairn is not for widows or orphans but a hold for those with patience; Keep a clear head and leave SABMiller alone
Click to follow
The Independent Online

Royal & SunAlliance, the UK's largest general insurer, is barely recognisable as the basket case that Andy Haste joined when he took over as chief executive in April 2003. Heavy losses from floods, asbestos and terrorism had left the business chronically underfunded - while investors were understandably rattled as they realised just how much risk the group was exposed to.

Two and a half years and one rights issue later, Haste has finally put the business back on a steady path - ensuring it has enough capital to continue growing the business, and yet is no longer exposed to many of the more volatile types of insurance that it was. As it sold its US motor insurance business last week, the company could finally make the boast that it no longer writes new business in any areas in which it does not have confidence.

What's left of its active business is in good shape. In the UK, its More Than personal insurance brand has improved profitability ahead of its target. Premiums are still falling in the commercial insurance market, but even here it is still managing to turn a profit at what is the most difficult part of the cycle.

Announcing its nine-month results yesterday, the group boasted an impressive doubling in its insurance result - a measure which combines underwriting profits with the returns which it makes from investing its clients' premiums. Some black spots within its portfolio remain. Legacy asbestos claims in the US could take decades to be resolved. However, having been careful to put aside reserves to protect itself from the worst-case scenarios, these risks are not as bad as they were.

Although its shares have hovered between the 80p and 100p mark for most of the past two years, the recent tangible results of the restructuring appear to be winning the City over. With the potential upside now outweighing the risks, we are moving RSA from a hold to a buy.

Cairn is not for widows or orphans but a hold for those with patience

It was vague but certainly positive. Cairn Energy, the FTSE 100 oil and gas explorer, was updating its shareholders on progress at its Indian fields, before it takes analysts out there to look at the drilling work being done. A "reappraisal of petrophysical parameters" in the main fields at its Rajasthan project "suggests that the current evaluation may have been conservative". There be more oil, in other words.

Cairn has had an extraordinary few years, buying a block of land in north- western India from Shell and then discovering it was sitting on 2.5 billion barrels.

Meanwhile, the world appears to have got used to the idea that oil is a scarce commodity, particularly in the face of surging energy requirements from the industrialising nations of India and China. That has pushed prices to $60 a barrel and kept them there, dramatically increasing the potential value of even the limited reserves Cairn is conservatively predicting it has.

The news was too vague for analysts to be confident of raising their estimates for the life and value of Rajasthan just yet, but it all adds to confidence. Until production actually starts in late 2007, there are plenty of opportunities for hitches, both technical and regulatory, with regards to the permissions required of the Indian authorities. This will not be a stock for widows or orphans, but for those willing to wait for production - or, more likely, a bid - it is worth holding.

Keep a clear head and leave SABMiller alone

It has been a few years now since Plato remarked that "He was a wise man who invented beer". Brewing is what, in investment jargon, you might call a mature industry. Some brewers may, from time to time, enjoy a period of dramatic profit growth, but investors must keep a clear head.

SABMiller has enjoyed a period of earnings growth since buying the US business Miller in 2002, but now its chief executive, Graham Mackay, wants a re-rated as a consumer goods stock akin to Reckitt Benckiser, which is growing because it keeps inventing new cleaning products. That is not SABMiller's game.

Mr Mackay confounded sceptics (including us) who said that Miller could never compete with the mighty Budweiser. He has made startling progress, particularly with Miller Lite. So startling that Budweiser has sparked a vicious price war to win back market share. SABMiller professes itself baffled the market leader would sustain a price war that is hurting Bud's profits proportionally more, but if it can wreck Miller's recovery, it will be worth it in the long run. SABMiller's growth is slowing sharply.

Its new tack has been the $7.8bn buy of Bavaria, a company with near-monopolies in Colombia and Peru, making it the second-largest brewer in South America. A growing middle class is drinking more (and more expensive) beer, so it is growing fast already. Unlike Miller, this is not a dog of a company where fresh management might generate trading surprises.

There is little product innovation to drive growth in brewing, and emerging markets have currency risks that balance the value of their growth. Avoid.

Comments