The Investment Column: Small is beautiful for the Saatchis

Hiscox's lacklustre shares worth a buy - Caffè Nero has right mixture
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The Independent Online

The Saatchi brothers, Maurice and Charles, are pursuing a very different strategy with their current advertising venture M&C Saatchi.

The Saatchi brothers, Maurice and Charles, are pursuing a very different strategy with their current advertising venture M&C Saatchi.

The company, where Maurice is an executive director (Charles is not involved in the running of it), reported its first results yesterday since listing in July - although the figures refer to a period when it was still a private company.

Unlike Saatchi & Saatchi, where the brothers made their name before being ousted in the early 1990s, M&C Saatchi is resolutely not prepared to expand by acquisition. Neither is it interested in opening offices all over the globe, just to have a presence in as many markets as possible. M&C Saatchi's pitch to clients is all about the fact that it is independent and its expansion plans are all about remaining small enough to be entrepreneurial.

An independent agency means clients do not have to worry about conflicts of interest - integrated media groups also have media buying, PR businesses etc to flog to their customers. M&C Saatchi purely does the creative work. Although it does not have the world-conquering ambitions, it is now about to expand in Continental Europe, where a greater presence ought to help it win more business.

The interim results were promising, with turnover up 10 per cent and pre-tax profit 9 per cent higher. Listed at 125p, the shares closed at a new high of 134p. Buy.

Hiscox's lacklustre shares worth a buy

Investors in Hiscox, the Lloyd's of London insurer, could be forgiven for getting impatient over the past 18 months. While the group has gone from strength to strength, in spite of fears over softening premiums, its share price consistently refuses to respond.

Yesterday, as it announced another impressive set of interim results - including an increase in net assets per share of 20 per cent, and a 61 per cent rise in earnings per share - the market reacted by marking the stock down 2 per cent. Since the start of 2003, during which time the industry has been approaching and enjoying the peak in its cycle, Hiscox's shares have risen just 6.5 per cent.

While part of this lacklustre performance may be down to growing fears of a sharp fall in rates, such a hard landing now looks unlikely. Furthermore, like other insurers, Hiscox was quick to point out that this year's hurricane season has been bad enough to have a positive effect on rates, but not bad enough to be too damaging to the company's bottom line.

Hiscox has a proven ability, and, more importantly, a sufficiently diversified business, to recover from future unknowns, such as terrorist attacks.

With its shares still trading at only a modest premium to its net asset value, it looks cheap at yesterday's close of 172p. Hiscox is worth a punt.

Caffè Nero has right mixture

The nation's addiction to lattes, espressos and cappuccinos has led to profits "cascading" into the cups of Caffè Nero, the high street coffee chain said yesterday as it announced a 127 per cent leap in annual profits.

Caffè Nero is making money thanks to its focus on a streamlined head office, regional management, supply chain and distribution infrastructure. This means Caffè Nero can now open new stores with little extra expense and get plenty of extra profit. It has also become self-financing, with its cash flow now more than paying for its expansion costs.

The branded coffee chain sector is predicted to grow by 10 to 15 per cent for the next three years. Caffè Nero and Starbucks, the market leaders alongside Costa Coffee, still only control 57 per cent of the market, meaning there is plenty of market share to mop up.

Helping the expansion plans is the fact that smaller retailers are being squeezed out of the high street, leaving neat spaces for coffee shops. Caffè Nero wants 400 outlets in the next three years, from 183 now.

At 98.5p, it trades on about 17 times forecasts. But it has a strong brand with good prospects in a growing market. Buy.

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