CAT's still a gamble while it waits to get the cream

Buy into the Brit Insurance turnaround; CAT's still a gamble while it waits to get the cream

There is a pretty good chance you are a Centrica customer without knowing it. The bizarrely named parent company covers a sprawl of businesses including British Gas, the AA, Goldfish and One.Tel. The company has been growing by more than 20 per cent a year and is in for an equally good 2003 – yet its shares were the worst performer in the FTSE 100 yesterday and are languishing at their lowest level since the middle of 1999. What's the market worried about?

All sorts. The results yesterday were a little shy of forecasts. Operating costs in the main UK energy business have risen sharply, meaning Centrica has failed to close the efficiency gap with leaner competitors such as Scottish & Southern Energy. And the pension deficit has grown to £831m, with some analysts expressing concern that this would be even higher on more prudent assumptions about returns. But though these issues are significant they are not going to overwhelm a group which is making progress in cross selling its services.

More worrying, there is confusion over strategy in its North American energy business. The company statement suggested a pause in the growth of customer numbers. Sir Roy Gardner, the chief executive, appeared in person to contradict this, insisting the target of 10 million customers stands. It appears regulation is delaying the opening up of US markets, Centrica's progress has disappointed, and this is a management woefully bad at eating humble pie.

Yet Centrica will still be acquiring customers in the US this year, and has stopped losing them in the UK. It should also benefit from lower UK wholesale energy prices and the movement towards profit of its Goldfish bank. The shares trade on 8 times earnings, and are a buy.

Buy into the Brit Insurance turnaround

General Insurers, in stark contrast to their beleaguered life insurance counterparts, have their punters over a barrel. The likes of Brit Insurance are busy raking in ever-increasing premiums to provide accident and casualty cover for buildings, ships, aeroplanes and employees.

Brit, the largest quoted Lloyds of London insurer by market capitalisation, said yesterday policy renewals were "exceptionally positive". Employers' liability insurance premiums doubled over 2002, casualty premiums were up 65 per cent and aviation premiums rose 50 per cent. Rates are expected to continue increasing well in to 2004.

It will take more than £1bn of premiums in 2003, a record. The management was canny enough to raise additional capital in two rights issues last year, giving it the capacity to pile on business while others are still trying to catch up.

The good news does not stop there. Brit said yesterday claims volumes in 2002 had been low. Simply, the company is getting more money through the door than it is paying out.

In the past, Brit's profitability has looked shakier than its rivals, which may explain why it is still one of the cheapest stocks in the sector. It is trading on 1.3 times the value of its net assets, compared with an average of 1.7. It suffered the biggest loss by an insurer from the attacks on the World Trade Centre, pushing it to a total £114m loss for 2001, and has since lagged the stock market recovery by rivals.

The turnaround will come through this year, with analysts expecting £6.7m in pre-tax profits for 2002, shooting up to £70m for 2003. Brit is in The Independent's annual share portfolio for the second time in a row this year, and with growth prospects for premiums still on the up, we are still recommending it as a buy at 82.5p.

CAT's still a gamble while it waits to get the cream

It is not clear that CAT has got the cream of the British biotech sector in its all-share acquisition of Oxford GlycoSciences, but it has certainly bought OGS's £130m cash pile on the cheap. The value of Cambridge Antibody Technology's offer is now £91m.

CAT has a history of this sort of cash-focused deal-doing, having last year tried to buy an investment company that owned a portfolio of drug royalties. It's all very clever, what CAT needs as much as cash is products. There simply aren't enough in the pipeline – even with OGS's Zavesca and its own rheumatoid arthritis drug Humira to be launched by Abbott this year – to get CAT through to profitability in five years time. It is a competitive market for drug in-licensing at the moment, so it could prove a struggle.

That said, the company is rich beyond the dreams of its rivals, and its antibody technology is highly regarded. Most analysts believe the potential value of the drug it does have so far would justify a much higher share price, if only investors fancied taking on the considerable risks. That won't happen until there is a much more widespread return of confidence in the stock market. Down 7.75p at 460.25, the shares may revive when Humira is approved for launch, but it is for gamblers only.