Next is still worth checking out

International Energy has power to go higher; Motor insurance makes Cox a nice little runner
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The Independent Online

For a guide to how well Next's shares will perform during this year's autumn/winter season, just check out the length of its mini-skirts. If you see anything more resembling a belt than a skirt, sell.

For a guide to how well Next's shares will perform during this year's autumn/winter season, just check out the length of its mini-skirts. If you see anything more resembling a belt than a skirt, sell.

Blame such unorthodox investment advice on the orthodox views of Next's customers, who prefer their fashion lukewarm to catwalk hot - as the high-street retailer learnt to its cost this time last year. Cut garments too tight, low, or in this case, high, and sales suffer, along with the shares.

Fortunately, Next has one of the savviest retail management teams around, so it is unlikely to make the same mistake twice.

Indeed, the group's figures yesterday showed that its ranges had hit the spot during the first half of the year, helping its retail arm to post a 15 per cent leap in operating profits to £85.8m. Less impressive, at first glance, was its like-for-like sales growth, which was 1.8 per cent in the six months to July. That is depressed by the aggressive policy of expanding stores and opening new outlets. In 28 towns Next has opened a second store close by, cannibalising some of the first store's sales but improving overall sales and profitability.

So, Next is desperately trying to move City attention away from like-for-like sales growth at its high street stores, preferring instead operating profits. Group-wide these rose 15 per cent to £113.6m on the back of the company increasing its selling space by one quarter.

The market may initially have been sceptical about the group's obsession with bigger and bigger stores, but the plan seems to be working. The new space is beating the sales targets set for it by 26 per cent and paying for itself in double quick time. The real test will come in 2006, when Next opens a whopping 80,000 sq ft outlet in Manchester - its biggest by far.

Share buybacks sent earnings per share soaring 24 per cent, although higher interest charges meant pre-tax profits were just 6 per cent higher at £123.2m. The group may need a makeover in the medium term, but its expansion story is not over. The shares, up 7p at 1,139.5p, look attractive despite a strong run.

International Energy has power to go higher

International Energy Group is not quite the utility giant its name suggests, but it has built a lucrative little business bringing gas to 40,000 homes in the Isle of Man and the Channel Islands, 40,000 homes in Portugal and 100,000 homes in the UK.

The company has been expanding in the UK and Portugal by building a gas pipes network into new housing developments, and makes its money charging energy suppliers (the ones homeowners actually sign up with and pay their bills to) to have their gas pumped through IEG pipes.

Inevitably, it is a market that has attracted the attention of Ofgem, the energy regulator, which is promising to reduce the profits that can be made by independent gas distributors such as IEG. Nervousness over what will happen when the new regime comes in later this decade is the main reason for IEG's lowly share price.

The worry is priced in. UK growth will slow, since it will take longer to get payback from building new pipelines, but there could be a little compensation from the increased housebuilding that is now being championed by the Government.

Customer numbers in Portugal are rising strongly, too, and there is likely to be a further acquisition to expand IEG into other European countries. Meanwhile, the dividend yields just under 4 per cent at yesterday's share price of 157.5p.

The company is quietly ambitious and worth backing at these levels.

Motor insurance makes Cox a nice little runner

The terrorist attacks of 11 September 2001 dealt a serious blow to Cox Insurance, leaving it with £125m of liabilities.

But the devastating event has forced the company to come up with a long-term survival plan. Cox put its Lloyd's of London business into run-off, bidding farewell to the exotic and volatile end of the insurance market, such as covering nuclear power stations.

Ring-fencing the Lloyd's business enabled Cox to raise £73m in a rights issue last year and it has used the money to power expansion in more predictable if less profitable lines, such as motor and household. Cox has shown that car insurance can be a nice little earner if you are able to operate in niches such as vintage cars, as well as the mainstream. It has been writing motor cover for decades and never made an operating loss, so it has the know-how to be this flexible.

Group operating profits more than tripled to £28.3m in the six months to 30 June. Its combined ratio - what insurers pay out in claims as a proportion of premiums - stands at 86 per cent (the ratio has to be below 100 per cent for insurance underwriting to be profitable).

Cox also has a rapidly expanding brokerage business, which is similar to the successful model of Direct Line. Cox co-ordinates a panel of insurers which its alliance of brokers can use. Inevitably many brokers use Cox itself, enabling the company to cherry-pick customers while also taking a cut of the business which goes elsewhere.

The market finds Cox tricky to value thanks to its hybrid nature, but Numis believes fair value is £1. The shares, up 4.5p to 84p, are worth a punt.

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