Investment Column: Capital reason to be happier about Aviva

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Aviva

Our view: Hold

Share price: 287p (+13.75p)

Television adverts for the insurance group Aviva say the group wants to quote its customers happy. Investors who have held the stock for the last 12 months will wonder why, with shares performing below the FTSE 100 average, they have been left feeling glum.

Yet the shares were in positive territory yesterday, after the company disclosed that it has built up its capital cushion to £2.5bn and that overall group sales raced away in the first quarter, up by 11 per cent on last year.

The chief executive, Andrew Moss, says that worries about the group's capital position have been an "overhang" to the share price and that yesterday's announcement should help to support the stock now that worries about a rights issue are out of the reckoning. This may indeed be an opportune moment to buy the shares, especially since the stock trades at undemanding levels. Watchers at Seymour Pierce agree and advise their clients to buy. They argue that the stock will reach 330p and that, trading at a 21 per cent discount to enterprise value, the shares are undervalued.

We have reservations about the group's exposure to potentially dodgy assets, especially mortgage securities and corporate bonds, however. Mr Moss says there were no defaults on its mortgage investments in the first quarter and it has hedged its equity investments, which is impressive, but this does not placate some analysts.

We worry that some of these investments still have the potential to go south and would wait for now. Hold.



Asos

Our view: Buy

Share price: 379.25p (+14.25p)

"How do you apply a price-earnings ratio to a company that grows at 100 per cent?" asks Nick Robertson, the chief executive of the online fashion retailer Asos. It is a fair question to answer the charge that, despite very good figures, the shares trade at a significant premium to the group's peer group on a price-earnings (p/e) basis. And regardless of any spanners thrown into the works by the analysts, investors would be mad to ignore one of the country's most successful retailers over the past 12 months.

The company issued its pre-close trading statement yesterday saying that annual sales to the end of March were up 104 per cent. International sales, which make up 25 per cent of the total and are an increasingly important part of the group's growth strategy, were up a remarkable 200 per cent.

Mr Robertson churns out the same old adage about not being immune from the economic mess that many retailers have found themselves in over the last few months. We think this is nonsense, and in the same way that it is rather ridiculous to apply a p/e valuation to a company like Asos, so it is to say that the recession is causing problems.

The shares have had a good run, up a third in the last quarter, and while a number of analysts are starting to check their targets, we still think there is room for growth. The group has signed a number of deals with brands such as Mango and Hackett for this summer, and the international expansion continues apace. Mr Robertson says that the online book giant Amazon has more than 50 per cent of its sales outside the US, and while we are not convinced that Asos will reach the dizzying heights scaled by Amazon we do think investors should dash to buy the stock.



SDL

Our view: Buy

Share price: 335p (+4.5p)

It cannot have taken too much time to translate SDL's brief and to-the-point trading statement yesterday. That the group did not go into great detail should not overly concern investors, however, as it did say that the group expects to beat market expectations on revenue and operating profits.

Those holding shares in the group that provides translation software to clients in North America, Europe and the Middle East have enjoyed a good year, with the stock in positive territory over the past 12 months.

The chief executive, Mark Lancaster, says he is ecstatic with the company's performance during the recession and trading is better than expected. For investors, the business model is defensive, he says, arguing that the clients rarely leave foreign territories and always need translation services. The other good news is that on 11.6 times 2009 earnings, the stock is hardly trading at pricey levels.

Buyers may baulk, however, at the news that there are no plans to pay a dividend. Mr Lancaster says the board prefers to keep the balance sheet in good shape and keep back a war chest for acquisitions.

Investors should certainly be backing those that show resilience in these dangerous times and, while we think it is time that buyers saw some cash from SDL by way of a dividend, we conclude that the strong performance of the stock justifies a punt. Buy.

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