Investment Column: Provident Financial's caution is a winner

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The Independent Online

Our view: Buy

Share price: 803p (+13p)

Most people are familiar with the story of the tortoise and the hare. In financial services terms, the hare would be Royal Bank of Scotland, which set off into the last financial boom at a rate of knots, only to blow up as it approached the finishing line of the good years.

In contrast, Provident Financial kept to its business model of lending modest amounts over the doorstep to known personal customers, with its agents paid on debt collection. Hardly heart-racing stuff, but in 2008 the group was the best-performing financial stock on the London Stock Exchange, with its shares ending in positive territory.

The group issued full-year numbers yesterday, saying that pre-tax profits were up 11.8 per cent in 2008 to £129m, with the chief executive, Peter Crook, saying that 2009 is expected to be strong. The group has £250m of headroom on its debt covenants and committed facilities of £1.1bn. The level of impairments is flat, says Mr Crook, and he assures the market that the company is being ever more diligent on how much it lends to whom, and when.

If investors are eager to buy into the sector, Provident Financial is frankly their only option. As the company was putting out its numbers yesterday, its competitor Cattles was issuing a second profits warning in as many weeks, with no indication as to when it would publish its delayed results. As an extra bonus tip for today, Cattles is a sell.

Provident Financial's stock is not cheap, but that rather goes without saying given the competition. "On our current 2009 forecasts, Provident Financial trades on a price-earnings ratio of 10.3 times and yields 8.3 per cent. The latter figure continues to reflect the high payout ratio that is part of the group's strategy. Our current target price is 990p and we have a buy rating," the analysts at Teathers say.

We do think that impairments will increase in 2009 as the recession takes its hold on people's jobs and they are left in a position where they can do little other than default, irrespective of the group's touchy-feely business model.

Caution, however, is the company's watch-word and the shares will be supported this year by the fact that there is no refinancing risk. Buy.

Admiral Group

Our view: Buy

Share price: 895p (+20p)

Record revenues, record premiums, record profits and a record dividend: it is pretty tough to argue that Admiral, the motor insurance group, had anything other than a very good year in 2008.

Ask most chief executives what their biggest fear in 2009 is and the usual response is the fallout on their business from the economic mess. For Admiral's chief, Henry Engelhardt, customer fraud is the biggest danger as the credit-crunched get tempted to file a dodgy claim. While investors should not consider this to be a major sticking point, analysts at UBS are cautious about pricing in the UK motoring insurance industry this year after strong premium growth helped the group achieve the aforementioned milestones in 2008.

Admiral announced its full-year results yesterday: profits were up 11 per cent to £203m, with the dividend being hiked by 20 per cent, giving a yield of 6.1 per cent on the end-of-February share price.

UBS may be right on a softening of UK motoring insurance premiums, and with the stock performing well in the past year, the shares are not cheap, with several watchers – including those at UBS – saying that it is prudent to hold, rather than buy, the shares.

Admiral, however, has a strong track record and relies on its low-cost online model, which is a plus in these markets. The fact that Confused.com, its price-comparison website, is still profitable in an increasingly competitive market is also good.

Despite also saying that they would hold rather than buy the shares, the experts at Numis like the price. "We continue to suggest the shares are attractively priced for a high-quality growth story [even though they trade at a premium] and expect the shares to outperform given the current attraction of resilient earning," they add.

We are naturally cautious in these markets, but we think 2009 will be another good one for Admiral and would be prepared to take a punt. Buy.

Pace

Our view: Buy

Share price: 75p (+15p)

Whatever the sector, those running companies that rely on discretionary spending are forever coming up with arguments to explain why their industry is sheltered from the worst of the shambolic economy. Most of it is tosh.

Investors could be forgiven for thinking that Pace, which provides technology for the digital television industry, would be struggling to sustain an argument about customers buying HD television technology, set-top boxes and other such luxuries.

According to the group's full-year results, published yesterday, they are not. Adjusted group profits were £28.5m, up from £15.4m in 2007, and the group is set to pay a maiden dividend. The market was impressed by the numbers, which beat expectations, sending Pace's stock up 25 per cent.

Analysts at the house broker Royal Bank of Scotland were ebullient and advised clients to buy. "In terms of valuation, new numbers put the shares on a 2009 enterprise value to net operating profit after tax of just 4.3 times," RBS said. The group says that it has not yet seen any downturn and is confident about 2009.

Investors should be cautious that Pace is still benefiting from the effects of its acquisition of the set-top box business of Royal Philips Electronics, which helped the strong profits increase, and its chief executive, Neil Gaydon, says that 2008 was transformational for Pace. The group now needs to ensure that this is turned into genuine value for shareholders. It has started well. Buy.

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