The Investment Column: Take profits on reinsurance broker Benfield

Big Yellow has some long-term benefits in store; Sneak in as Snook comes on board DDD Group
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The Independent Online

When the biggest hurricane season in history hit the US last autumn - causing between $60bn (£34bn) and $80bn of damage - Benfield was one of the few companies in any sector, and one of even fewer in the insurance industry, to emerge as a net beneficiary. As a reinsurance broker, its revenues and profits almost entirely depend on the demand for and price inflation of reinsurance.

Six months ago, things were not looking so great. With premiums falling and the insurance market apparently in the downward part of its cycle, Benfield's profits were falling and its shares were moving sideways.

Enter hurricanes Katrina, Rita and Wilma, three of the biggest storms on record hitting the US in quick succession. With billions due to be paid out in claims, premiums began to rise again, as well as demand for both insurance and reinsurance - creating a clean break in the cycle.

At the same time, regulatory intervention in the US, which highlighted bad practice within some of Benfield's rival companies, presented the group with the perfect opportunity to expand. Consequently, the group invested some £12m in its infrastructure and staff to capitalise on the moment.

In the months since the hurricanes, Benfield's shares have soared by almost a third. However, updating the market yesterday, the company conceded that the effect of the catastrophes on its second half had not yet been as significant as it may have hoped. On the bright side, however, it said it expects that the best is yet to come. In fact, it believes the full effects of last autumn may well still be coming through in 18 months' time.

Against such a backdrop, Benfield is naturally optimistic for 2006 and forecasts revenue growth of up to 20 per cent. But the question now is how much of this has already been priced in by over-exuberant investors in the wake of last autumn's events.

Its shares are currently trading at an exorbitant 32 times last year's forecast earnings - almost double the valuation of its closest UK listed rival Jardine Lloyd Thomson. Benfield's stock may still conceivably climb a little higher, but for those who are not already shareholders, it's far too late to join the party. Existing investors may want to think about taking some profits soon.

Big Yellow has some long-term benefits in store

The self-storage group Big Yellow is expanding fast. It surprised investors yesterday with news that it had acquired five extra freehold sites in December, taking the total number of stores the group has opened or in planning and development to 52.

Given the competitive nature of the property investment market these days, this is a great result for Big Yellow and means it is on track to meet its growth targets.

The company is replicating a US business model, building self-storage warehouses in densely populated parts of the country where people can house their junk if they have accumulated too much of it or if they are about to move house.

The average customer keeps things in storage for eight months and more than half the business relates in some way to the housing market. Some of this is home improvements, and as a result the group is not as dependent on a buoyant housing market as it might seem.

Big Yellow is in essence a play on demographic trends. People are moving house more often and are living in increasingly smaller homes. This trend is unlikely to be reversed any time soon and despite the extra sites the group has secured, Britain has a long way to go before it reaches the density of the warehouses that are common in the US.

Meanwhile, Big Yellow is a conservatively run operation. Despite its property assets the group has only modest debt levels and it is intent on growing organically. Both of these factors reduce the risks associated with an investment in the company and make its shares a long-term hold.

Sneak in as Snook comes on board DDD Group

DDD Group has developed a piece of software which can transform two dimensional images (2D) on mobile phones and television screens into three dimensional ones (3D). Yesterday the group announced two vital bits of news to the City which could prove to be the making of the company. First, it unveiled a £1.3m fundraising, the proceeds of which will finance DDD's future development.

Also, and probably more important, was news that the mobile phone industry bigwig Hans Snook has joined the board as a non-executive director and that he bought a 3.1 per cent stake in the company via the fundraising. Mr Snook's reputation in the mobile phone industry is second to none (for those who don't remember he founded Orange in 1994 and quickly turned it into a global player) and having him as a director is clearly a big coup for what is still a very small company.

More recently, Mr Snook has had great success as a director of the mobile phone content operator MonsterMob and Carphone Warehouse and there is no doubt that his knowledge and industry contacts will be invaluable to DDD.

So far the group has secured a key licensing deal for its software with a top five mobile handset maker - for legal reasons the company has not disclosed its name - and further such agreements are very likely in the future. But the beauty of DDD's software is that it goes beyond the mobile phone arena. It allows normal 2D pictures from TVs, digital cinemas and computer games to be played on 3D displays without requiring the content to be created specifically for 3D, which greatly adds to the company's potential revenue streams and makes it more desirable from an investment point of view. If Mr Snook is backing the group then so should investors. Buy.

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