Investment Column: Prudential is looking a risky bet

Hold on to an impressive British Vita; Malcolm looking good in the middle of the road
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The Independent Online

Last year's 40 per cent dividend cut was difficult enough for Prudential's investors to swallow. How galling will it be if it still turns out not to be enough to fund the growth that the historic life insurer plans in Asia?

Last year's 40 per cent dividend cut was difficult enough for Prudential's investors to swallow. How galling will it be if it still turns out not to be enough to fund the growth that the historic life insurer plans in Asia?

While the sale of Egg is still on the boil, there is the prospect of topping up reserves to the tune of £1bn, but the lack of news on a deal has depressed the shares. Failure to secure a clean exit will be a big blow to Jonathan Bloomer, Prudential's chief executive, and heighten everyone's fears that a big equity fund raising is inevitable.

Couple that with disappointing sales of insurance products in Asia in the first quarter, and it is little wonder the Pru's shares were down yesterday.

Don't hit the panic button yet. Mr Bloomer assures us that the sharp slowdown (sales went backwards if you convert them into sterling, and were up only 4 per cent in local currencies) was a temporary blip caused by a restructuring in its Japanese and Taiwanese divisions.

With so much of the value of the group built on hopes for an explosion of saving in the increasingly wealthy Continent, and on the Pru being able to take a large slug of that business, this will be a key area to keep an eye on. Investors must see Mr Bloomer's optimism backed up in numbers by next quarter.

Across the group as a whole, sales were in line or even slightly above most analyst expectations. In particular, the UK delivered better sales than feared, with consumer confidence in the savings industry at least not getting any worse. US sales shot up thanks to new institutional business. After a dire 2003, which saw overall profits fall 30 per cent, yesterday's numbers at the very least finally showed the first solid hints of consolidation.

Mr Bloomer has persistently shrugged off those who believe it is only a matter of time before the Pru comes to the market to raise extra capital, and so far he has been true to his word. But with scepticism mounting, this company looks a risky bet at the moment. There will be other times to buy into what is still a long-term growth story.

Hold on to an impressive British Vita

You may not instantly know what British Vita makes but you could well have used its products every day of your life. It processes the materials that industry uses to manufacture products including foam for chairs and sofas, car parts and non-woven materials used in disposable nappies.

The tough economic environment has held back results over the past few years, and the company also had to fess up to accounting irregularities in its US non-wovens business. Yet this is a long-term success story in the speciality chemicals sector and its focus on cost controls will stand it in good stead as the recovery gathers pace.

Unfortunately, with 50 per cent of its sales in Continental Europe, that will come later to Vita than for other cyclical stocks. A trading update yesterday said that the upturn seen at the tail end of last year had continued in the first few months of 2004, but trading is not yet returned to the level of before the Iraq invasion.

Vita shares have been on a modest upward trend for a few years now and are up 20 per cent since we advised holding on a year ago. They have been buoyed by the launch of a share buy-back campaign, made possible by the sale of a big stake in a US venture. Some £83m has been spent to date, and perhaps another £40m is still to come.

The cash generation of this company is impressive relative to its chemicals sector peers, as is the security of its dividend yield - almost 5 per cent this year at yesterday's share price of 262.75p. The valuation looks okay, too, at 12 times CSFB's earnings forecast. Hold.

Malcolm looking good in the middle of the road

Malcolm's in the middle. This Scottish logistics group is a middleman for industries such as the drinks industry, the supermarkets, and printing, warehousing and transporting unfilled bottles and newsprint or bottles of Scotch around the UK.

The company is what remains of Grampian, a conglomerate that once took in Scottish businesses as diverse as animal tranquilisers and woollen mills. Built up by Donald Malcolm (who inherited, at the age of 14, one horse and cart and one lorry from his father in the 1940s), and now run by his son, Malcolm is battling hard against its bigger competitors and the tough pricing environment. A new distribution contract from Diageo, the spirits maker, helped turnover in the main logistics business rise 8 per cent in the year to January.

Malcolm has a sideline in construction services, laying astroturf, hiring out trucks and doing basic construction work. This is growing faster at the moment, as it gets more work from satisfied customers. Here, too, though, margins are under pressure. In all, group turnover was up 20 per cent, but profits rose only 5 per cent to £7m.

Malcolm is unusual in owning most of its fleet of trucks and other vehicles, and the properties it uses. This strong asset backing and its good cash flows give confidence in the company. At 87p, the shares have a 6 per cent dividend yield. Worth tucking away in your sporran.

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