The Investment Column: Standard Life investors should pocket the profits

Jessops; SSP Holdings
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The Independent Online

Our view: Take profits

Share price: 332p (-2.75p)

The Scottish insurer Standard Life is a totally different company to the basket case that was teetering on the brink of collapse three and a half years ago. Since then, chief executive Sandy Crombie has slimmed down the workforce, started putting profit before volume, and done away with the group's mutual status, to give it easier access to capital.

Since its flotation last July, things have continued to go to plan. Changes to the pension regulations last April have been a boon to new business and profits across the whole life insurance sector - not just at Standard Life.

However, its strong position in the fast-growing and highly profitable self-invested personal pension (Sipp) market has meant it has prospered even better than some of its competitors.

Meanwhile, the company is growing quickly through its joint venture in Asia. And while it has yet to make any profits there, it is well positioned to benefit from what promises to be the fastest-growing region for the financial services industry over the next few decades.

Members who held on to their windfall shares when the company floated last year should be very happy. The stock has advanced more than 40 per cent since last July, and loyal customers, who have not cashed in their free shares, will be in line for another handout this summer. This, however, may be the time to take some winnings off the table.

With the effects of the pension regulation changes now fading, the next few years are likely to prove tougher. And after such a strong run in the share price, it is now hard to make the case for any further short-term upgrades in the stock.

Standard Life has a great franchise, and it is sure to be a major force in the UK life and pensions markets for many years to come. But for now shareholders should take profits, and look for stronger returns elsewhere.


Our view: High risk buy

Current price: 19.75 (+1)

The investment case at the photographic retailer Jessops is about as straightforward as it gets - either the company is going to collapse and the shares will become worthless, or it is going to survive and the shares will be worth considerably more. Rumours of interest from potential private equity buyers had little impact on the stock yesterday and there is no doubt that new chairman David Adams has his work cut out to turn the company around.

Mr Adams has a successful 20-year background in retail, having been deputy chief executive and finance director at House of Fraser prior to its acquisition by Baugur. With his background, it is fair to assume that Mr Adams would not have taken the job if he thought that Jessops was a lost cause.

It all went wrong for Jessops because of a dramatic fall in demand in the consumer digital camera market that caught the company by surprise. It retains a lead in the professional market, but that is a relatively small proportion of total sales.

The company is likely to break its financial covenants before the end of the summer, but with more than £53m owed to creditors the banks will be very keen to see Jessops survive. As will the likes of Canon and Nikon, who have few other high-street outlets for their top-end cameras and the associated paraphernalia that goes with them.

The company needs £18m per year just to meet its property rental and interest costs. Broker Cazenove expects the company to record a full-year loss of £12m on sales of £330m, and the market capitalisation of just £20m reflects the extremely difficult market conditions.

However, investors can probably ignore the valuation; it is of little consequence given the perilous state of the company. Jessops has warned three times since the start of the year but while more bad news cannot be ruled out, investors with plenty of appetite for risk should consider betting on survival and snapping a few up.

SSP Holdings

Our view: Buy

Current price: 142.5p (unchanged)

Since its flotation in October last year, SSP shares have risen a remarkable 45 per cent, yet the company has not appeared on many radar screens. That is likely to change with SSP's acquisition of rival Sirius Financial Solutions, a deal that expands the company's product line and geographical reach.

SSP will pay £43.4m for its general insurance software rival, a price that equates to around 19 times Sirius's earnings. SSP believes that it is the largest supplier of software and services by revenue in the UK general insurance market, a claim that will be strengthened by the acquisition. The deal represents a good exit strategy for Sirius management. After suffering product development issues a few years back, Sirius is in full recovery mode, with revenue up 9 per cent and profits rising over 20 per cent in 2006. Yet its operating margin of 10.4 per cent pales in comparison to SSP's 25 per cent, leaving much room for upside.

Insurance software has proved a tough environment for companies like Misys, Marlborough Stirling and Sirius, but SSP could yet prove that it is a lucrative sector. With a number of investment houses alerted to the company's potential on the back of the Sirius deal, this could prove a good time to get serious and buy the shares.