Investment Column: Don't be lured by Resolution's valuation
John Menzies; Highland Gold Mining
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Wednesday 17 August 2011
Our view: Sell
Share price: 267.9p (+0.1p)
The last few months have not proved happy for investors in Guernsey-based Resolution, whose vainglorious bid to create a UK super insurer is not looking so super any more.
It now looks like the target of reaching £10bn in terms of market capitalisation was wildly over-ambitious. Recent statements warning that it won't be overpaying or indulging in dilutive deals suggest that there probably won't be any more deals.
Which leaves it with the job of integrating Friends Provident, AXA's UK business and Bupa Health Assurance. To be fair the (blended) price paid for the three was competitive: Killik puts it at 67 per cent of the "embedded value" of the three businesses or, in other words, the notional value of their respective existing books of business.
Yesterday, the group said operating profit more than doubled to £390m from £151m, although deals boosted the former figure. It was, however, still ahead of consensus hopes of £356m.
The group should deliver on targeted savings of £39m by the end of 2011 and the integration appears to be on track. The interim dividend is up 18.5 per cent to 6.47p, and the prospective yield is now a rather attractive 7 per cent, with plenty of cash on the balance sheet that can be returned to shareholders. There is also a healthy £2bn capital surplus over the regulatory minimum, so there shouldn't be too many worries about Resolution's financial strength.
However, while the valuation metrics might look attractive, the fact that Resolution is basically a bit of a ragbag of second-tier life insurers cannot be overlooked. The most obvious comparator is Legal & General, which produced an excellent set of results recently and is very much a top-tier player. If we had to pick one of the two as a home for savings, L&G would win out. The same goes for the shares. Resolution is a sell.
Our view: Buy
Share price: 505.5p (+50.5p)
John Menzies brings together two different businesses. The aviation arm is a leading supplier of aviation handling and cargo services to some of the world's biggest airlines, while the distribution business is a key part of the newspaper and magazines supply chain in the UK.
The two divisions are, unsurprisingly, hostage to the rhythms of the industries they serve. So, aviation is booming, with yesterday's half-yearly results showing that turnover had climbed to £332.7m, against £300.9m last year. At the same time, the division's underlying operating profits were up by £4.7m at £13.8m.
Distribution was less successful, with both turnover and profits easing over the period. If you strip out the impact of last year's performance, which was lifted by the activity generated by World Cup collectables, the result was largely flat, which, given the tough trading conditions in its main markets, is not be scoffed at. Indeed, the company deserves credit for keeping the division on an even keel.
Turning back to aviation, we expect to hear news of further growth, as industry has rebounded strongly from the slump endured during the financial crisis two years ago. Adding to the attraction is the fact that, at just over seven times forward earnings, John Menzies looks downright cheap.
Highland Gold Mining
Our view: Buy
Share price: 175p (+1p)
Gold prices have been on an upward trend for some time now, but the recent spike stands out, with the yellow metal setting a string of new records in recent weeks. Highland Gold, however, has not rallied in tandem. Indeed, its shares are well below the recent peak of 199.5p struck in December.
In a trading update yesterday the group, which operates in Russia, announced it had managed an 8 per cent jump in its first-half production. Although slightly disappointing for some in the City, the company did reassure investors that it was on track to meet its expectations for the year.
The update may have provided little exciting news, but it does highlight that Highland Gold seems to provide good value compared with its peers. One school of thought is that if a gold miner doesn't move sharply up with the price of the commodity, then it will also avoid a large correction if the metal starts heading the other way. So, ahead of the group's half-year results next month, Highland, with its strong balance sheet and its previously stated desire to make acquisitions, seems a steady prospect.
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