The Investment Column: RSA is risky but has potential rewards

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The Independent Online

Our view: Buy

Share price: 124p (-2.75p)

Royal & SunAlliance's chief executive, Andy Haste, must have much fewer sleepless nights than his predecessor. As he stood up to address shareholders at yesterday's annual meeting, he began with the boast that "2005 was a good year for the group" - and it was. Since taking the reins three years ago, he has sold off the group's life assurance business, closed all operations in the US to new business, and repositioned RSA to focus on growth areas which carry less risk.

For a long time, the City would not touch RSA shares - leaving them floating between 80p and 100p for more than two years until the end of 2005. But with the sale of the US commercial motor insurance business towards the end of last year, they have finally begun to recover.

Not only does the business look much less risky, but the company now looks for the first time as though it could be an attractive takeover target. Its More Than retail brand is exceeding all expectations, and all open parts of the business are profitable in spite of a challenging commercial market.

All this has helped push up the share price, and until the recent market falls, the shares traded at almost four-year highs of more than 140p - a rise of 40 per cent since we upgraded the stock from "hold" to "buy" in November.

There is still some risk here, however. Ongoing litigation in the US could yet come back to bite the company, while claims on its state-side legacy business could also be unfavourable. These issues may take years to iron out. However, Mr Haste has done all he can to minimise the risks here.

RSA is not a stock for widows and orphans, but for those willing to accept a degree of risk, there is potentially a rewarding upside.

ITE Group

Our view: Hold

Share price: 128.25p (-1.75p)

ITE Group, the conference and exhibition organiser, has come a long way since late 2001 when its shares hit a low of 13.25p after an ill-advised acquisition spree. Now trading close to an all-time high at a little more than 130p, the shares reflect the remarkable turnaround the company has achieved in the past four years.

Results for the first six months of the year showed turnover growth of 15 per cent to £26.2m, along with £3.7m of pre-tax profits, comfortably ahead of the highest City forecasts. The company has an emerging markets focus, with Russia and Central Asia the top performers. Less than 10 per cent of revenues are generated outside emerging markets.

The global demand for commodities stocks has created a new drive in infrastructure spending and ITE has benefited from its strong position in trade and industry conferences as well as its long-term presence in these markets.

While the company retains a strong balance sheet, with £15m of cash and no debt, it is well positioned to achieve the ambitious double-digit growth targets it has set itself. The combination of strong cashflow and zero debt also makes it a potential target for private-equity buyers.

However, discounting a takeover bid, the shares are up to date with developments, and the company will find it tough to continue to deliver strong results should emerging market economies slow.

On a price-earnings ratio of 19.8 times for 2006, the stock trades at a substantial premium to the market and from a technical point of view the share price graph looks weak. While there are not enough good reasons to sell the stock, for new investors there are better-priced opportunities elsewhere.

Regus

Our view: Buy

Share price: 106.75p (-5.75p)

Regus, the office space provider, has achieved a dramatic turnaround in its fortunes. Under the chief executive Mark Dixon who founded the company in 1989, it expanded rapidly during the dot.com mania but came close to collapse when the boom ended and many of Regus's tenants went bust. After a massive restructuring Regus now runs 750 centres in 300 cities across 60 countries and boasts customers such as Nokia, Google and ABN Amro.

The group provides fully functioning office space with secretarial support to start-ups and larger businesses looking for temporary accommodation for special projects. It has learned its lessons from the near-collapse and now rents its space on more flexible terms.

Regus swung back into the black last year with profits of nearly £39m. The recovery has continued in the first three months of this year when revenues climbed 27 per cent to £132.3m. Regus is now reunited with the UK business it sold during its financial troubles in 2002. It depends on the US for 60 per cent of its profits, and while the outlook there appears reassuring for now, the office market needs to be watched carefully.

Regus is a cash-generative business but also highly cyclical. While not cheap at 15.9 times forecast earnings, the shares are worth a look for those willing to take the risk.

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