Investment: Independent's fortunes leave rivals red-faced

THE UK insurance giants must be furious with Independent Insurance. For the past couple of weeks, the likes of Royal & Sun Alliance, CGU and Guardian have blamed tough markets and bad weather for large falls in their profits. But just when investors were starting to convince themselves that the slump was an industry-wide phenomenon, along comes little Independent Insurance to spoil the party.

Yesterday's interim results - showing a modest rise in operating profit and a 48 per cent advance in pre-tax profits to pounds 38.5m - were a slap in the faces of the big boys. And unlike most of its rivals, Independent managed to post a pounds 7m profit on its underwriting operations, the core insurance business, despite an pounds 8m hit for bad weather.

Two factors are driving the outperformance. First, Independent's underwriters are under strict instructions not to chase policies at all costs. They can only underwrite risks which are profitable and will pay for themselves during the lifetime of the policy.

This simple trick allows Independent to squeeze a larger proportion of profits than its rivals from a lower volumes of premiums.

Second, Michael Bright, the chief executive, is a passionate believer in long-term relationships between insurer and insured. His drive to convince customers to sign up for policies of up to five years, rather than the traditional 12 months, helps Independent to weather the vagaries of underwriting cycle.

This strategy has paid off so far with earnings growth above the industry average and is set to continue in the near term, especially if the insurance market improves.

After yesterday's 13p slide to 278.5p the shares trade on a multiple of around 15 times expected 1998 operating profits, falling to around 12 in 1999. This is a discount to the market and to Independent's peers. Buy.

Flextech goes

into the black

ADAM SINGER, chairman of Flextech, the television group, can expect a dressing down. After all John Malone, who runs the TCI cable group, which owns 37 per cent of Flextech, believes companies should not make a profit. Any company that does, he argues, is not investing enough and is wasting valuable money by running up a tax bill.

Contrary to the boss's orders, however, Flextech yesterday reported a first-half profit, albeit a small one. In the six months to June, it made pre-tax profits of pounds 1.68m, compared to an underlying loss of pounds 1.65m in the previous period.

The news was enough to lift Flextech shares by 5 per cent, up 23.5p to 497.5. But Mr Malone needn't get too worried. The chances are that Flextech will slip back into a loss in the full year as the start-up costs of its UKTV joint venture feed through.

Even so, it's going to be hard to keep Flextech out of the black in the coming years. The future of multi-channel television - the notion that people want more than just the five channels they can get at the moment - looks pretty well assured.

Someone needs to supply all those channels and Flextech, through its joint venture with the BBC, has a ready supply of programming to please the average couch potato. Because it is independent of the various different distribution platforms, Flextech will benefit no matter whether satellite, terrestrial or cable emerges victorious from the coming digital battle.

Add in the potential upside from projects such as TV Travel Shop, a channel which encourages viewers to book holidays while they watch, and other interactive projects, and Flextech's future looks compelling viewing. Don't let the chunky forward multiple of 16 times 2001 earnings put you off. The shares are good value.

Grim times

for Danka

DANKA BUSINESS Systems has to be one of the more gruesome corporate horror stories of the recent years. In the past year, the photocopier distributor has watched its shares lose most of their value following a series of drastic profit warnings.

Yesterday, investors suffered even more blood and gore as first-quarter profits fell more than 60 per cent to pounds 8.1m. Even though Danka had primed the market to expect the worst, its shares shed another 16.5p to close at 132.5p.

The situation looks grim. Margins are being eroded by cut-price competition from Japan and Danka's sales force are confused following the introduction of a new bonus scheme. Meanwhile, shrinking interest cover - its interest bill was covered less than two times by operating profits in the first half - has forced Danka to renegotiate covenants on its pounds 450m-odd of debt.

Clearly, Danka will have to work hard to restore its credibility. The appointment of two new executives should beef up its sales operation, allowing Danka to - albeit belatedly - keep the promises it made at the time of the acquisition of Kodak's copier distribution businesses.

Should Danka complete the turnaround, the upside will be huge. As the first-quarter figures show, profits are heavily geared to revenues. If sales start growing again, earnings will rebound sharply.

At the moment, the market is sceptical, valuing Danka's pounds 2bn-odd of sales at little more than pounds 300m. It's not for the faint-hearted, but if Danka pulls it off the shares could be the recovery story of 1999.

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