The Investment Column: Take a punt on Prudential as it rides high on global success

Click to follow
The Independent Online

As Prudential unveiled better-than-expected annual results yesterday, it barely resembled the basket case which surprised the market with a £1bn rights issue 17 months ago. Back then, with its shares languishing at 14-month lows, and the chief executive Jonathan Bloomer under pressure to resign, shareholders were incensed.

Today, with the new chief, Mark Tucker, having been in his post for 10 months, the group is sailing steady again. Although much of the groundwork for today's success was laid before Mr Tucker arrived, he must be given credit for bringing clarity to several uncertainties which hung over the group until recently.

The last few months of Jonathan Bloomer's reign were characterised by uncertainty over the future of its 79 per cent stake in Egg. Having tried and failed to sell the holding, Bloomer left shareholders hanging on for more than a year before he withdrew it from the market. But this was not the resolution investors were looking for.

Within months of his appointment, Mr Tucker eliminated this uncertainty by snapping up the remaining 21 per cent of the company that Prudential didn't own, claiming a combination would create synergies.

The future of the company's US business, Jackson National Life, was another uncertainly removed by Mr Tucker's arrival. He chose to commit to the region, and revealed yesterday that sales at Jackson had overtaken the UK for the first time.

Although the UK market remains challenging, Pru managed to win market share last year, and is well positioned in all the key markets. In Asia, it is by far the biggest of the UK players, with a seemingly unassailable advantage. While in the US, the potential of the soon to retire babyboomers is enormous.

Like all life insurance stocks, Prudential remains vulnerable to an economic downturn in the UK, as well as any fall in US or UK stock markets. External factors aside, however, it looks in better shape than it has done for the best part of a decade. Its shares have risen more than 25 per cent since we tipped them in October, and while its valuation is more demanding, Pru's stock remains a good long-term bet. Buy.

Gondola

From a distance, Gondola Holdings, which owns the PizzaExpress restaurant chain, seems to be doing all the right things. Its interim results yesterday revealed a 7 per cent rise in earnings before interest and tax to £38.7m, a 4 per cent jump in like-for-like sales and a maiden dividend of 2.3p a share.

Gondola has opened 10 restaurants so far this year and aims to open 10 more over the next six months. Management brushes aside suggestions that new sites are cannibalising existing ones, and argue that its different chains - alongside PizzaExpress is Ask and Zizzi - are complementary and that there is plenty of growth still left in the market. They cite industry forecasts that by 2025 half of all meals consumed in the UK will be eaten out of the home. Currently, this figure stands at about 35 per cent.

But Gondola has its risks. It has far too much debt, for a start. Borrowings stand at £350m and, for a restaurant group which leases its sites, this is a little high. An economic slowdown could quickly leave the company's balance sheet looking very stretched.

In the short term, its shares are likely to come under pressure as most in the market expect private-equity holders to exit the company in May, when the lock-up governing their stake expires. Until this passes, and Gondola pays down some of its debt, itsstock is probably best avoided.

ArmorGroup

Twenty years ago ArmorGroup would have been described as a mercenary outfit. Today it is called a "protective security services" company. Either way, the group's purpose is to cash in on the world's war zones and trouble spots, and recently it has been making a killing.

Yesterday it unveiled pre-tax profits for 2005 of $12.1m (£6.9m), a slight drop on the previous year but nevertheless a handsome sum. Analysts expect this to rise to $12.6m next year. Unsurprisingly, Armor generates the majority of its revenues from the Middle East (and the bulk of these from Iraq in particular). Afghanistan is another important country for the company, as is Nigeria, which over the past six months has faced increased strife.

The group says that over the past 12 months its order book has soared from $144m to $196m. It is important to stress that this total is by no means money in the bank for Armor and can be subject to delays. In fact, one such delay led to a profits warning in November. Rising costs are another risk, especially in Iraq. As the country heads towards civil war, Armor is having to spend increasing amounts of money ensuring the security of its personnel.

Trading at 9 times forward earnings, its shares are by no means expensive. But given the risks to the group's earnings, they are best left alone.

Comments