Expansion into Europe benefits CU

The Investment Column

For several years, Commercial Union has stressed the need to expand into Europe and diversify away from general insurance. Third-quarter results started to show the fruits of that strategy.

CU's world-wide new premium income rose 23 per cent to pounds 2.21bn, largely boosted by a strong performance in Europe.

At the same time, the group's life assurance operations in 15 countries accounted for 43 per cent of total net written premiums, up from 36 per cent two years ago.

In France, sales of single premium investment products through its subsidiary, formerly L'Abeille Vie, rose by 27 per cent to pounds 1.25bn, although regular premium income dropped to pounds 25m.

Similarly, a strong performance from Delta Lloyd in the Netherlands saw single premium sales rise 31 per cent to pounds 153m.

Even in Poland, a country most insurers would have fought to avoid doing business in, Commercial Union has winkled out sales of pounds 33m, a rise of 131 per cent.

For Commercial Union's strategy to have come right is all the more useful, given that in its UK heartland a wheel appears to have dropped off. True, sales of annual premium products rose to pounds 36m, up 24 per cent, boosted by good pensions business, an increase in sales of mortgage endowments on 1995 and a strengthening in the protection market.

But new single premiums, which many other life insurers increasingly say is the life blood of the industry, albeit a slightly uncertain one, dropped 12 per cent to pounds 261m.

CU says this is in part attributable to the fact that this time last year the company was marketing a highly successful investment bond. This was not on offer in the third quarter of 1996. It hopes its newly-launched Premier Investment Bond can still mop up plenty of savers' cash in the fourth quarter. But, if anything, the quarter-on-quarter dip in UK sales serves to underline the fragility of the market even for CU.

In the past quarter UK composite insurers have been strong performers, collectively outperforming the market by about 5 per cent.

CU has been at the weaker end of the advance, with the share price getting most of its strength from rumours of a bid by ABN Amro for the entire business or for Delta Lloyd in the Netherlands. Over the past four years the shares have moved solidly sideways.

As insurers at last begin to benefit from a mild strengthening of general insurance rates and life assurance earnings provide additional underpinning to dividend payouts, Commercial Union looks safe enough but its yield of over 6 per cent remains the real attraction.

Share pricing in Limelight

Limelight Group, which owns some of the best-known brands in fitted kitchens, bedrooms and bathrooms, yesterday announced the approximate pricing of next month's proposed flotation. The shares, available through an intermediaries offer as well as a placing to institutions, are to be priced at between 175p and 190p, coincidentally valuing the Moben, Kitchens Direct, Sharps, Dolphin and Portland group at from pounds 175m to pounds 190m.

As is becoming increasingly common, shareholders are expected to decide whether to invest on the basis of a range rather than a fixed price which, while not exactly a stab in the dark, is hardly a satisfactory state of affairs. Companies claim it allows them to price issues more finely, but really it is another erosion of the rights of small shareholders in favour of the large investors.

In fairness to Limelight, the range it has announced represents rather less than 10 per cent of the proposed offer price, a great deal more precise than the recent Thistle Hotels float which expected investors to agree to pay anywhere between 170p and 210p for their shares. For most investors the difference between 175p and 190p should not be a decisive factor - if Limelight is worth buying at the lower end it still is at the upper.

On the basis of forecast profits for the year to December of pounds 16.5m, earnings per share of 10.6p will put the shares on a prospective price/earnings ratio of between 16.5 and 18.

While that is not cheap relative to the market as a whole, against companies such as DFS and Allied Carpets, arguably the closest quoted rivals, it looks good value.

Limelight has a steady recent record, having increased profits from pounds 7.8m in 1993 to pounds 13.4m last year and the outlook seems set fair for more of the same with consumer spending on the up and householders reported to be keener to put bonuses or building society windfalls into value-retaining assets such as kitchens or conservatories rather than holidays or new cars.

Quibbles about the pricing aside, this looks to be a well-run company and the shares should start well. The intermediaries offer remains open until 13 November with official pricing the next day and first dealing on 15 November.

Record giants sing the blues

It is hardly surprising that EMI shares caught a cold when PolyGram sneezed yesterday. Both record company giants are facing the same competitive pressures which include a softening of the music market in some countries, particularly the US, a slowdown in the growth of the CD market and the rapid decline in cassette sales.

So when PolyGram issued a profits warning blaming a softening market, and announced heavy restructuring provisions, EMI shares tumbled 23.5p to 1,256.5p in sympathy - their lowest since the company was demerged from Thorn-EMI in August.

The bid froth that pushed the stock to 1,485p immediately after the de- merger has evaporated; market experts are reining back their expectations of the sector's growth prospects.

For all this, the situation is not as bad for EMI as it may appear. Though the US remains the world's largest music market, accounting for a third of total sales, it accounts for only a quarter of EMI's revenues. The company has also been restructuring its US operations so further provisions are unlikely when the company announces its interim results in mid-November.

EMI has achieved considerable success in its European stronghold with acts such as Blur, Supergrass and the Spice Girls. Developed markets are slowing down but others in the Far East and eastern Europe are showing promise. The key to success is the all-important Christmas period which accounts for around 40 per cent of sales. Again, EMI has some blockbusters scheduled for release including the next instalment of the Beatles anthology.

But it is clear that after the frenzy of excitement which surrounded EMI's shares in the summer, cold market realities are creeping in. The shares may have further to fall. Analysts are forecasting full-year profits of around pounds 420m-pounds 430m which puts the shares on a forward rating of 22. Unexciting.