Pru is handsome but too heady

Fibernet; European Motor
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The Independent Online

Scared to invest in equities in these volatile markets? Fine, how about bonds instead? Either way, Prudential has the investment product for you, and its third quarter new business update showed that this broad portfolio of products has kept the group growing handsomely throughout the equity investment downturn.

The Prudential figures yesterday were way ahead of anything the City had been forecasting and answered some of the fears that have dogged the insurance giant in recent months. Has mutual fund investing in the UK collapsed? No. What about in the US since 11 September? Not there either. Surely slowing economic growth will scupper progress in Asia? Not yet. And would the closure of the Pru's direct salesforce in the UK lead to a decline in product sales? No again.

Fixed income fund sales helped M&G, the UK fund manager, keep its new business slide to 8 per cent, while unit trust sales are running 17 per cent down across the industry. Even in the US – where Prudential's need to bolster its operations was set back by the collapse of an over-ambitious merger deal with American General – sales were better than feared, despite more cautious comments on margin pressure.

There are storm clouds in the east, though, and a warning that its period of stellar growth in Asia may be coming to an end, at least for now. The signs are already evident in Singapore and Taiwan and Prudential expects the malaise to spread in the final quarter.

The shares jumped 17p to 735p and, at almost twice its embedded value, Prudential is valued at a significant premium to the sector. Gordon Aitken at CSFB calculates that the multiple would be even higher if analysts were to use the lower assumptions of equity market returns commonly used by other big insurance groups, rather than Prudential's less conservative 8 per cent.

Prudential's heady rating is almost entirely down to the Asian operations. In the long run Asia, and China in particular, will surely be a key driver of Prudential's growth, but the short-term worries put the premium at risk. Avoid.

Fibernet

It is a year since a £77m rights issue at a yawning discount shocked Fibernet's investors. The deal trashed the shares, but strengthened the company.

Now, the damage has paled in comparison to the value destruction wreaked by the fall of the telecom sector as a whole. Fibernet, a high-speed data carrier, has built up networks in the UK and Germany and now France, and is likely to sport the greenest of shoots as investors look to generate a telecoms sector recovery.

Full-year results for the 12 months to the end of August, released yesterday, showed continued progress, although short-termist profit takers pulled the shares back 10p to 370p. Turnover was up 30.5 per cent as the new German services began to generate revenues. Profit before tax, up 7.4 per cent to £3.6m, pleased analysts. And the group still has net cash of £59m, which should provide a comfortable cushion should there be any slip-ups in the continental expansion plan.

A neat deal with the beleaguered KPNQwest has given Fibernet access to additional fibre optic cable in France. That means it can get its services up and running ahead of schedule, while being able to delay capital expenditure.

Although the investment will trim profits next year, this column has long had confidence in Fibernet's level-headed management. Because Fibernet has no debt – the only telco where that is the case – and a business model that does not require an additional injection of cash, the risks are much reduced. The stock is a long-term buy and short-term returns could be impressive, too, since freedom from debt is already making it a favoured play on a wider telecoms sector recovery.

European Motor

Like most car dealerships European Motor Holdings has been accelerating smoothly all year thanks to a combination of falling car prices and tumbling interest rates. The shares have more than doubled since December and rose another 4.5p yesterday to a new 12 month high of 103p.

But is it all about to come screeching to a halt? Yesterday's half-year figures from EMH showed no sign of it. Profits at the Volkswagen, BMW and Jaguar specialist rose 12 per cent to £5.5m in the six months to August. Since then September sales were strong although most of those orders were placed before the terrorist attacks of 11 September. October has looked good too and Richard Palmer, the chairman, says he can see no evidence of a downturn.

To an extent, EMH has benefited from its focus on upmarket models where demand for the new shape Mini, the Volvo S60 and the Jaguar X-type has been strong.

Then there is EMH's Wilcomatic car wash business, which has just won a deal with Asda to own and operate six centres this year and another 12 next. Agreements with other supermarkets may not be far away.

But it is hard to be bullish about a sector so exposed to rising unemployment. Assuming full-year profits of £9.3m the shares trade on a forward price-earnings multiple of 8 and yield 7 per cent. That all seems positive but after a turbo-charged run it looks like time to take profits.

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