Catlin float best left to institutions

Costain's rating offers little to build on; Parity could have the right programme for growth
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The Independent Online

Stephen Catlin is one of the major figures in London's insurance market - and the company he founded 20 years ago and which bears his name will be joining the stock market next month.

Catlin Group is one of the fastest growing insurers, with specialties in property and casualty insurance, and it wrote two-thirds more business last year than in 2002. With operations in the exciting new insurance market of Bermuda and a non-Lloyd's of London business in the UK, it is at the forefront of developments in the insurance industry. The plan is to raise £110m of new money at flotation, another useful chunk of cash to back business while premium rates are sky high and still rising.

And here's the rub. The insurance industry is in a sweet spot - just the right moment for Mr Catlin's venture capital backers to be selling down, in fact. As well as the dramatic upturn in premium rates which began before, but was hugely accelerated by, the atrocities of September 11, the industry has enjoyed something of a lull in natural disasters and, hence, improved profitability. No wonder Catlin's combined ratio - payouts as a percentage of premium income - fell to 87 per cent in 2003 from 114 per cent the previous year.

Mr Catlin, though, is not selling stock for at least a year and insists he sees no sign of rates peaking. Some areas of the market, though, are coming to rest. Profits will flow for a few years, but the stock market knows well that this is a viciously cyclical industry. It is difficult to see combined ratios improving from here.

Catlin set the price range for its share offering yesterday at 350p-420p, valuing the business at £560m-£664m. In the middle of the range, that values the company on about 1.5 times book value. That compares with its rival Amlin's 1.9 times, but Amlin shares are overpriced. The institutional investors who get in at the Catlin float will be paying a fair price for a good company, but there seems little upside for the long-term investor buying the after-market.

Costain's rating offers little to build on

Costain, the building company, stared administration in the face in the Nineties, but it has pulled itself back, way back, from the abyss.

The company yesterday reported a 42 per cent rise in profits to £16.1m for 2003 and profit margins, which are always wafer thin in this industry, continue their plod towards the average 3 per cent. They are now 2.5 per cent and should hit their target by 2006. The management, under Stuart Doughty, its chief executive, have done well and shareholders have been handsomely rewarded with the stock at its strongest since 1996.

The key has been shifting the business away from building contracts paid for with a single up-front payment, where the risk of cost overruns is born entirely by Costain. Barely 15 per cent of turnover now comes in this way (although that still leaves a significant risk), and Costain has done well to build long-term relationships with the Highways Agency for roadbuilding and most impressively in the water industry. Here it runs infrastructure improvements for the utilities, and ought to profit as water bills rise to allow for extra investment.

There are other negatives for Costain, though. Most noticeably, it has a £40m pension fund deficit that isn't easily going to be whittled away. The company said yesterday it saw some evidence of a slowing in the release of private and public funds for infrastructure projects. And a resumption of dividend payments cannot now be expected until next year. With the shares, at 46.5p, on nine times next year's ambitious profit forecasts, they are too expensive.

Parity could have the right programme for growth

Parity is an IT business with three separate divisions: one provides IT advice and sets up new computer systems for business; a second provides IT training; and a third is a staffing business, supplying IT contractors to work on temporary projects. It has suffered one of the worst crashes since the end of the IT spending boom, compounded by overpayment for acquisitions and the discovery of accounting irregularities at a Dutch division (which had to be closed at the cost of a whopping £12.2m to the 2003 bottom line).

So Parity has been a mess. Its pitch yesterday was that, with an IT spending recovery in its early stages, and having slashed costs to the bone, things are coming together in 2004.

Not an unreasonable claim. Sales in consultancy services and staffing were up in the second half of the year compared with the first. And a £9.2m rescue rights issue last year restored the balance sheet to health.

Analysts came away unconvinced that the company's three divisions really do belong within the same group. Managers talked up cross-selling opportunities, but it has signed just one contract that involves all three businesses and the talk is probably more to do with the fact that Parity failed to sell its staffing business. Maybe a lucrative offer will come this year. Worth a punt.