Investment Column: Aveva's prospects justify shares' rating

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Aveva

Our view: Hold

Share price: 1059p (+16p)

Aveva investors took a bath in the wake of Lehman Brothers collapse, an unfortunate side-effect of a share price tied to the oil price and a moribund marine industry. The stock has rebounded off its lows in March of 455p but insiders believe it is still undervalued, with its operations in the oil sector particularly exciting.

Aveva designs software to support projects such as oil rigs, shipbuilding and power plants, tracing its roots to a government-funded group set up in 1967 to promote computers in engineering to British industry. Yesterday it released a confident interim management statement from October to date. The oil, gas and power market, which makes up just over a third of the business, is looking strong. Aveva has benefited from ongoing projects and strong demand, particularly from emerging economies such as Brazil, where resource finds drive new sales.

The energy plants business had slowed as projects became harder to finance in the worst of the economic crisis, but the company is confident it is coming back.

It's not all good news. The marine operation (a fifth of the business) has struggled along with the wider marine market and uncertainty remains.

But the company has a strong balance sheet with net cash and no debt. It is cash generative, and is supported by analysts, who believe it still has good long-term potential.

The shares yield just 1 per cent, but there has been talk of a special dividend to shareholders if Aveva decides not to push ahead with M&A activity. The group's price sits at around 20 times March 2011 earnings, although that falls to about 17 times when cash is stripped out, which looks good next to US rivals. We were cautious earlier this year, but with the economy in better shape, Aveva yet to surpass its pre-Lehman's price, and prospects looking attractive, we now say buy.

Hiscox

Our view: Take profits

Share price: 326.2p (-1.6p)

History tells us that the best time to buy into Lloyd's insurers like Hiscox is just when things look to be at their worst – usually right after a swath of huge catastrophe-related claims.

But last year was exceptionally light in terms of really nasty disasters in places where people can afford insurance, and this year appears to have started similarly well. (Haiti is not in the latter category, sadly.)

That shows in Hiscox's figures – at the half-year it had an astonishing combined ratio (premiums against costs and claims) of 79.5, meaning that it made £20.50 for every £100 of premiums written. But, as ever, others have noticed and come into the market, forcing rates down (by 5 per cent or more, said Hiscox in yesterday's trading statement). They are still high by historic standards, but they are falling.

Of course, Hiscox is not just about this sort of business (written at Lloyd's). It has a UK unit that focuses on the wealthy and is doing nicely. It also offers a range of specialist products. And in general underwriting across the industry has improved.

Trading at about 105 per cent of the estimated value of this year's in force business, the shares are not expensive by historic standards, and this is a quality company which deserves a premium. That said, we remain concerned about the direction of the market. Long-term we've been holders of Hiscox. Now it is time to take profits.



Hornby

Our view: Hold

Share price: 145p (+3p)

The resilience of the toy maker Hornby is really quite remarkable. In an age when video games, television and smartphones seemingly dominate our ever-dwindling free time, the group that produces Airfix kits, train sets and Scalextric is quietly doing well.

The company issued a trading statement yesterday which showed a robust Christmas trading period. Hornby also confidently predicts that this year's full-year numbers will be much better than last year's. Other pluses include a reduction in the group's debt, firmer arrangements with suppliers and an improving sterling to dollar exchange rate. Investors have been rewarded handsomely with the shares jumping by nearly 50 per cent in the last 12 months.

While there is plenty to give the stock a boost – it has the toy rights for the 2012 Olympics, for one thing – investors may think that much of the good news is already priced into the shares. Trading on a 2010 price to earnings ratio of 15.6 times, the stock is not cheap, and despite the upbeat statement, there is no hint of a dividend. Hornby is improving but, with the shares no longer a bargain, we say hold for now.

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