The Investment Column: Resilient Northern Rock is not easy to knock

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The Independent Online

Our view: Take profits

Share price: 1,158p (-10p)

It is never easy to knock lumps out of Northern Rock. Here is a well-run mortgage bank that knows its business inside-out and makes a point of delivering on promises.

Hard on the heels of upbeat figures on the UK mortgage market at the end of last week, yesterday's trading update was never going to be anything other than ebullient.

Nine months into 2006, the Newcastle-based lender remains comfortable, with City forecasts for profits before tax of £357m for the year as a whole. That will be a 15.9 per cent improvement on 2005.

Its own internal target of underlying growth in assets and profits of 20 per cent is still more demanding. And it is relaxed about this, too.

Bad debts will be lower in the second half of the year than in the first. Higher mortgage payments and steeper utility bills have left more Britons struggling to make monthly payments on their homes. But Northern Rock's book is dominated by loans secured on residential properties, and unsecured and commercial arrears remain low.

Specialising in making cheap loans to those with better credit histories, Northern Rock's £6.5bn pipeline of new lending for the three months to the end of September is an impressive 18 per cent greater than at the end of June. On top of that, a joint venture with Lehman Brothers is expected to allow Northern Rock to offer home loans to riskier borrowers early next year.

Costs, when set against income, remain easily the best in the sector.

The shares, which have climbed by almost 20 per cent since July, eased 10p to 1,158p yesterday. They are yielding only a mean 2.7 per cent and trading at about 11.8 times expected 2007 earnings, which looks expensive against the 9.9 times typical for UK domestic banks.

Northern Rock is undoubtedly a great little business in a thus-far resilient mortgage market. But investors are advised to take profits in the short-term.

Admiral Group

Our view: Buy

Share price: 856p (+27p)

The car insurer Admiral has been one of the FTSE 250's biggest successes since it floated on the London market two years ago. Its shares are now more than treble the price at which they listed, and though conditions look set to toughen over the coming months, Admiral's diverse portfolio of brands - which include Elephant, Diamond and Confused.com - leave it better positioned than most to weather the storm.

The rest of the motor insurance sector is feeling the pressure. With the cost of claims having soared in recent years - driven in particular by the rising cost of personal injury claims - most insurers have seen their profit margins eroded. However, when Norwich Union finally caved in last month and declared that it was hiking its premiums by as much as 40 per cent, Admiral didn't even blink. Chief executive Henry Engelhardt says Admiral has the lowest cost-base in the industry and can afford to continue writing business at current levels. NU's price hikes can only drive more business its way.

Numis yesterday upgraded the stock from Reduce to Hold after increasing its growth forecasts for Confused.com, sending the stock another 3 per cent higher.

Its share price cannot continue to rise so quickly over the coming months, but Engelhardt's commitment to keep returning surplus cash to shareholders continues to make the stock attractive. The company is now also knocking on the door of the FTSE 100, and if it succeeds in gaining promotion, its shares are surely set for another boost. Buy.

Coda

Our view: Hold

Share price: 162p (-6p)

Its name refers to the conclusion to a piece of music, but the recent demerger of the Coda business from SciSys may prove just the beginning.

The company is now a pure play accounting software vendor and its well-established management team can focus solely on that market.

The demerger also makes the business easier to value against its peers, and increases the likelihood of it becoming a takeover target.

Coda provides its blue-chip clients with financial accounting software. Its software is in demand due to increasing corporate governance requirements, although it competes against some heavy-hitters such as SAP and Oracle.

First-half results suggested flat customer spending compared with last year, but the company is likely to invest in attacking rival System Union's customer base. Meanwhile new products should drive organic growth.

At 162p, the shares trade at a premium to its peer group at 18 times projected 2006 earnings. The company deserves to trade at a premium due to its steady growth profile and low-risk business model, and investors should hold for now.

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