The Investment Column: Southern Cross's share price will soon be heading north

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The Independent Online

Our view: Buy

Current price: 580p (-13p)

Most of us know if only because we are likely to have an ailing family member in care that an ageing population is placing huge strains on government.

The demographics are not encouraging. Around 14,000 new long-term care beds will be needed every year between now and 2031.

The challenge facing private-sector healthcare providers is how to meet this demand while, putting it bluntly, delivering a reasonable profit to shareholders in what is, rightly, a heavily regulated industry.

Southern Cross Healthcare, in terms of the number of beds, is the largest provider of care-home services for the elderly. It also caters for people suffering from physical or learning disabilities.

Growth has been rapid in a sector where it is essential to have scale in order to drill down costs. This is vital when around 80 per cent of revenue comes from cash-strapped local authorities and the NHS.

In its first full year as a public company Southern completed 10 acquisitions, lifting the number of available beds to more than 36,000, giving it 8 per cent of the market, with occupancy levels at 90.7 per cent.

The acquisitions helped to boost total revenue by 20 per cent, to 731m, while the underlying performance showed a more modest improvement of 6.6 per cent. Pre-tax profits came in at 3m, slightly below expectations because of higher interest charges, compared with prior year losses of 17m, which reflected adjustments associated with its stock market listing.

Despite turmoil in credit markets, Southern bankers are giving full backing to its growth ambitions. An increasing number of smaller operators, burdened by regulations and pricing pressures, are heading for the exit. Changes to the capital gains tax regime are likely to lead to a flurry of deals early next year. Southern expects to be in the vanguard of further consolidation.

The shares eased 13p to 580p, but have performed strongly since floating at 225p in July 2006. Southern should soon head north again. Investec has a target price of 832p.


Our View: Avoid

Current price: 297.25p


The headwinds which buffeted the reinsurer Benfield Group during the first half of the year have shown no signs of easing. The shares buckled yesterday after a warning that a weak dollar and softer prices within the reinsurance sector were blowing it off course for the full year. They recovered before the end of the session, but the worry is that Benfield may have to batten down the hatches for some time to come.

The company warned investors full-year trading profits will be marginally lower than previous expectations, overshadowing news of a 150m share buyback over the next two years and a new debt facility of up to 300m.

Analysts had been looking for full-year trading profits to come in unchanged at 74.9m. That is now likely to be modestly scaled back.

Benfield's alert should come as no surprise. Some 65 per cent of revenue is in dollars, so a 1 per cent movement against sterling can leave the trading result 800,000 weaker.

The company points to an otherwise sturdy underlying performance, and says it is doing better than its competitors. But Benfield is operating in much more challenging conditions. The big increase in the price of reinsurance products triggered by the severe hurricane losses of 2005 have continued to ease as supply exceeds demand from insurers content to absorb the risk themselves. This trend is expected to continue well into next year.

Benfield has been adapting to changing conditions by increasingly promoting a range of new specialist financial products, but these are unlikely to make up the shortfall from its traditional revenue source.

After falling 26p the shares recovered ground to finish 6.75p easier at 297.25p, but scope for any significant upside in the short term appears unlikely.


Our view: Sell

Current price: 64.75p (-13p)

The last thing a seller needs is to have to explain the big dent in the side of the product to potential buyers. Unfortunately that's the position FKI finds itself in after some key US customers deferred orders for automated material handling systems such as airport baggage handling and retail distribution conveyor belts due to a loss of confidence in the US retail sector.

As a result of a cumulative loss of contracts, the company's FKI Logistex unit will record sales 15 per cent lower than expected in the second half of the year, and profits will also be hit.

The warning comes only two weeks after FKI guided toward an improving growth rate in the second half, but more importantly, it reduces the attractiveness of the Logistex division, which FKI intends to spin off or sell. Shares tanked 17 per cent on the back of the warning, despite the company's other divisions performing well. With analysts uncertain as to when the division will turn around and the disposal crucial to FKI's long-term strategy, its shares look set to underperform for some time.