Investment Column: Aviva still has some questions to answer
Reckitt Benckiser; Rightmove
Wednesday 03 November 2010
Our view: Hold
Share price: 402.3p (+4.7p)
Having spurned the unwanted attentions of Royal & Sun Alliance, Aviva has produced a moderately positive set of third-quarter numbers which suggest that Aviva was right to resist its rival's rather ill-judged attempt to push it into selling its general insurance business. That's not least because in certain lines of insurance (such as UK motoring), the tide is finally moving in Aviva's favour. But will these numbers see off the rumblings in some parts of the City that the life insurer just doesn't seem to be able to shrug off? Especially those break-up calls? That's a more open question.
It's not just Aviva, to be fair. The company's great rival, Prudential, is also plagued by break-up talk and it could just be that the problem is the City's perennial short-termism – the feeling that there has to be action of some kind, even if it is simply action for action's sake. Still, while these are both very different businesses, they are, for whatever reason, also both seen by some as offering more to investors by being split up – even if it is a little unfair to characterise Aviva in the same breath as the dog's dinner that is Pru.
But the flat performance of Aviva shares during the past 12 months tells its own story. And so did the rather defensive tone of our conversation with the company yesterday.
Aviva should keep the dogs quiet for now, however, with its target of £1.5bn of capital to be generated by the end of this year, its promise of £400m in cost savings, and its pledge to focus on its 12 biggest and/or fastest-growing territories. It will also take steps to remove the millstone of the final-salary pension scheme from around its neck. On valuation grounds, Aviva, which is increasing sales, still trades at a modest discount to the value of its existing policies, so the shares are not overpriced. But nor are they a screaming bargain. Hold, then, in the hope the targets are met.
Our view: Hold
Share price: 3,557p (+32p)
Reckitt Benckiser, the consumer-goods giant, unveiled a mixed set of third-quarter numbers yesterday. The maker of the toilet cleaner Harpic showed an uplift in margins, boosted by its continuing cost-cutting measures. It smashed City expectations for gross margin, which jumped by 80 basis points to 60.2 per cent, while operating margin rose by 210bps to 24.7 per cent at a business which last week completed the £2.5bn buy up of Durex to Scholl shoes group SSL.
Analysts were also cheered by the continued lack of generic competitors to Reckitt's methadone substitute, Suboxone, in the US. In total, for the third quarter, Reckitt delivered net revenue of £195m for the group's prescription drug business, up a third.
While net revenues at the North America & Australia division rose by just 2 per cent, the star performer was its developing-markets division, where sales surged by 18 per cent in Q3.
However, Reckitt suffered flat revenues in Europe, in part, thanks to increased competition for Vanish and damp sales of its water softeners and laundry detergents. Furthermore, after investors marked up Reckitt's shares yesterday, they now trade on a 2011 multiple of 16.3 times forecast earnings. This is the main reason why we are cautious on Reckitt's shares, and it will also take Reckitt time to integrate Durex and Scholl to its 17 other so-called biggest brands. So hold.
Our view: Hold
Share price: 786p (-1.5p)
Investors in Rightmove, the property website, have enjoyed a share price performance since the depths of last year's housing malaise that is nothing short of stellar. From less than 160p in January 2009, the recovery in the market and Rightmove's ongoing dominance of the sector has seen a relentless rise to well over 700p.
Yesterday's trading update showed more good news with "healthy growth in revenue and earnings and strong cash generation". The company added that use of the site is running close to record levels, with page impressions up 16 per cent over a year earlier, while estate agency and letting membership rose 4 per cent. As such, the interim dividend was raised 2p to 5p and there will be more share buy-backs – there is £31.3m of cash on the balance sheet. The only real black cloud is the uncertainty over the housing market.
We've had our fingers burnt betting against this one in the past, and everything looks good, but on a price of 22.1 times estimated full-year earnings, Rightmove is hardly cheap. Still, we think the shares are worth holding.
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