The Investment Column: With Gershon in control Premier can rise again

SMG shares are still not worth tuning in to; Benfield premium is not justified
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The Independent Online

The company ousted its previous chief executive earlier in the summer after a dire performance and Sir Peter has stepped into the breach, temporarily. He will start interviewing candidates for the chief executive's job in October.

However, the doughty Sir Peter is not twiddling his thumbs in the meantime. Yesterday he announced 130 redundancies to generate £4.7m of savings of which £2.7m will be added to profits this year with the remainder reinvested in the company's online ordering systems, which should lead to even more efficiencies. Sir Peter's plan is to stabilise the business and knock it into shape so the new chief executive will have a solid base from which to grow.

On the surface, interim figures announced yesterday for the six months to 31 July confirmed the fairly grim state the business is in.

Sales are flatlining while operating profits have fallen £3.3m to £34m. Sir Peter's own assessment of the performance was "lacklustre". Not surprisingly, the shares fell 4.8 per cent to 153p.

There are reasons for hope, however. Sales in the UK fell 3 per cent although industry data suggests the component distribution market during the six months fell 11 per cent. Mainland Europe saw sales up 6.3 per cent and the company is generating plenty of cash, helping Sir Peter to maintain the half-time dividend.

The real problems are operations such as Premier's BuckHickman InOne, the UK's leading industrial tools distributor. Sir Peter has promised to announce the outcome of a root and branch review of the business in March with full year results. It will be rebalanced toward higher-margin smaller company accounts.

He is also forcing Premier to invest in readiness for new regulations on hazardous substances, which means it must buy new inventory, although there is as much opportunity in the new regulations coming in July next year as extra cost.

Underneath it all Premier Farnell is a solid business. It is reassuring that Sir Peter actively reshaping the company in the short term for the benefit of its long-term health. Buy.

SMG shares are still not worth tuning in to

Buoyed by a £2m saving in licence fees, SMG, the Glasgow-based media business that owns the main ITV franchise in Scotland, was able to announce a 68 per cent increase in pre-tax profits yesterday for the six months to the end of June.

Strip out the £2m and in the increase is £700,000 or 17.5 per cent. Turnover was up 7 per cent as the company enjoyed some benign advertising markets but as Andrew Flanagan, the chief executive, pointed out, life for a company such as SMG is a tough one.

"Advertising markets remain short term and erratic," said Mr Flanagan and the second quarter was tough as feared. There are, however, signs of "firming" advertising spend, he said.

But SMG has a history. Having got itself overly indebted in the 1990s with acquisitions such as Virgin Radio the company had to sell off assets to balance the books. The buy and build strategy left it with a hotch-potch of media assets that only makes the vaguest sense. Alongside Scotland's channel 3 franchise and Virgin Radio, SMG owns an outdoor bill-poster advertising business and Pearl & Dean, the cinema advertising sales house.

The company will continue to benefit from some uptick in UK advertising this year, and while a break-up could come, it is not a reason to rush in. SMG's discount to peers such as ITV is deserved. Avoid.

Benfield premium is not justified

As the waters in New Orleans subside and the full scale of the disaster across the US's Gulf coast begins to emerge, insurers can start counting the financial costs of the storm.

Benfield, a reinsurance broker, also stands to benefit. The company, which was set up by the late Chelsea Football Club director Matthew Harding, acts as an intermediary to place reinsurance cover for insurers and will be put to work finding new contracts for its clients following the storm.

From 9/11 through a swathe of hurricanes to Katrina, insurers have faced large claims over the past few years and have been keen to pass on its risk elsewhere. As a broker, Benfield does not take on risk itself, but simply rakes in a percentage of the premiums its customers pay. This makes it very cash generative, and while premiums rocket Benfield enjoys the ride.

Premiums have been falling, however, for the past two years, and the company yesterday announced a 10 per cent drop in interim profits to £72m. But the multibillion-dollar claims from Katrina will inevitably push premiums up again, pouring in better commission rates for Benfield.

It is also investing £20m in recruiting staff to expand into the primary insurance market.

The company was one of the biggest floats of 2003, but this column believed that Benfield looked overvalued at the time. While Katrina should provide a boost for Benfield, its shares, at 295p, already look inflated. Seek shelter elsewhere.