Investment Column: As a General rule – hold inexpensive L&G

Rexam; WS Atkins
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The Independent Online

Our view: Hold

Share price: 76.35p (+2p)

Some of the shine has come off L&G in recent years – and some of the charm too, sadly.

But with the entire life insurance industry suddenly showing a bit of momentum, particularly in the fourth quarter, is it worth adding to a Legal holding? Maybe. L&G hasn't quite produced the expectations-busting surge of, say, an Aviva but the company argues its business mix is more stable than most, showing less of a downturn in sales when times were tougher, and therefore less of an upside now.

On the year, sales fell just 3 per cent (less than some rivals) to £1.39bn, bang in line with the consensus forecast. Within that number, there was a pick up in the fourth quarter and some very good results from the fund management arm.

Of more importance to investors, however, was the fact that L&G doubled its cash generation to more than £650m, well above the target of £450m. It has done this in part by keeping a tight hold on costs, in part by focusing on selling more "modern" savings products such as unit trusts at the expense of old fashioned, capital intensive life insurance plans. At a time when capital is scarce, that will be very welcome to L&G's investors, who last year faced up to the first dividend cut the company has made in living memory.

The shares have been soft recently, although they are still well ahead of the 62.15p at which we advised a buy at the beginning of August. However, even at that level they still look cheap, trading at just 76 per cent of the estimated embedded value of the business and just 9 times forecast 2010 earnings.

Even after that embarrassing dividend cut, the prospective yield is worth having at 4.9 per cent, and with L&G building up capital, it could improve soon. All that said, L&G does not offer the potential for growth of rivals such as Aviva or Prudential which are more diversified with better geographic reach. But with a positive outlook for 2010, we'd continue to hold the shares.


Our view: Hold

Share price: 277p (-5p)

Some positive signs yesterday from Rexam, the drinks can maker, which raised £334m in a rights issue in August to ease pressure on its investment grade status. This helped it cut debt to £1.8bn by 31 December and was by no means the only good news in the full-year results yesterday, despite a pre-tax loss of £59m, largely thanks to one-offs. Rexam – which also has plastic packaging, healthcare, personal care and closures (tops for bottles) divisions – touted a strong improvement in cash flow to £290m at the year end, compared with a £128m outflow in 2008. It has also proposed a final 2009 final dividend of 8p after ditching the interim payout.

Shares in Rexam trade on a relatively modest multiple of 10.2 times forecast 2010 earnings. The company's new chief executive is making the right noises on costs and cashflow, but investors should note some less buoyant comments in the statement too. Of these, the core beverage business suffered weaker than expected sales volumes in Europe, as customers shunned speciality cans during the recession. While both Europe and the US showed signs of improvement in the second half, Rexam cited "ongoing uncertainty" concerning those speciality cans and a dire performance in Russia. We believe Rexam is over the worst in most of its global markets, but are tempted to wait until 2011 to crack open the investment can. Hold for now.

WS Atkins

Our view: Strong buy

Share price: 571.5p (+9p)

An encouraging management statement from WS Atkins. The engineering consultancy says it has performed in line with expectations over the last five months' trading, despite "turbulent" market conditions.

The Design and Engineering business has seen the biggest turn-around, cutting back on water-related activities after Ofwat's stringent determination for the next five-year pricing period, and boosting resources to the nuclear and renewables divisions. And, despite the dire position in Middle Eastern markets such as Dubai, WS Atkins is sticking to its guns, extending its geographic reach and skills.

Despite the concerns about both the Middle East and the UK public sector, WS Atkins is sufficiently diversified to remain attractive on a purely business case. But the big draw of the stock is its valuation. The shares trade on a multiple of next year's forecasts of just 8.1 times falling to 7.7 times, according to Panmure Gordon. That is well below the sector average. And the group's enterprise value to earnings ratio is 2.9 times, the lowest in the consulting sector. Add in the 5 per cent dividend yield, and WS Atkins starts to look very attractive. The shares have fallen over the past few weeks largely due to concerns about the Middle East but they are still ahead of where they were when we said buy at 557p in June. But they still offer excellent value. Atkins is a strong buy.