Investment Column: Pru has work to do to regain our trust
Great Portland Estates; Charles Stanley
Thursday 11 November 2010
Our view: Avoid
Share price: 623p (-7.5p)
At the beginning of June, with Prudential in turmoil over its disastrous failed bid for Asian insurer AIA, we decided it was time to sell its shares, with their value at 541.5p. Since then they have recovered strongly, and yesterday the company produced a creditable set of numbers.
Annualised sales for the first nine months came in up 24 per cent at £2.464bn, in line with City forecasts. New business profit at £1.345bn was a touch better than expected. Life insurers generally have been enjoying an upsurge in business recently, but Pru's ace in the hole remains its existing Asian operations, the main driver for yesterday's growth (sales up a third).
So even without AIA the company is doing very well there. Which makes one wonder why the company ever thought it was a good idea to blow £350m on an ill-conceived £22bn bid.
It's that question that, despite the positive numbers, still puts us off Prudential. Because it is really a question about management, one that Prudential has yet to provide a satisfactory answer to. It's hard to find any indication that the company has really learned anything from its misadventures, so the shares come with a health warning. The business is going well, but can they be trusted to do the right things to keep it on an even keel?
We're not sure. Valuation wise, Panmure Gordon notes that Prudential shares are trading at close to the company's expected 2010 embedded value of 637p, calculated by totting up the value of all Pru's existing policies plus those expected to be sold by the end of the year (the prospective dividend yield is unexciting at 3.3 per cent). That gives Pru no credit for any future growth. So you could construct a case for the shares being undervalued. But we'd apply a management discount and they've had a good run recently. We're inclined to just keep a watching brief for now. Avoid.
Great Portland Estates
Our view: Keep buying
Share price: 345p (-2.4p)
Little to complain about in Great Portland's half-yearly update yesterday. The valuation of its portfolio rose by a healthy 7.3 per cent to £1.4bn, overcoming the recent pull-back in the commercial property recovery. That Great Portland did well relative to the wider market is no surprise, given its focus on the more robust West End segment. But that's only part of the story, as the business notched up a total property return of more than 10 per cent, beating the Investment Property Databank's central London index, which was 8.3 per cent higher.
We were also pleased by the note of caution in the chief executive's statement. Instead of simply crowing about Great Portland's strengths, Toby Courtauld was frank enough to acknowledge that growth rates in London's investment markets have slowed over the past year. He also said that more sedate conditions will persist into 2011 because of economic uncertainties. The candour goes a long way in inspiring our confidence.
But does caution argue against our current buy stance? No. Tenant demand remains encouraging. Letting activity is holding up, "with solid rental value growth". The shares may appear a tad pricey, trading as they do on a 10.5 per cent premium to September 2010 net asset values, but this is a strong company exposed to a strong part of the market. Keep buying.
Our view: Buy
Share price: 247.5p (+6p)
A nice surprise from Charles Stanley the stockbroker, whose chairman, Sir David Howard, says that he's looking ahead with "a degree of optimism", despite a future that's still rather cloudy. Sir David was speaking as the company unveiled some good results for the half ending 30 September. Revenue was up 7 per cent to £59.7m while adjusted pre-tax profits were up 24 per cent to £8.2m. Funds under management grew to £13.5bn.
Clients have returned to the markets, not least because interest rates, at an all time low, leave them nowhere else to go. But their confidence has been boosted by rising share prices and, like Sir David, they are showing signs of optimism. His view is that the corporate sector is in rude health through tight control of costs (something Charles Stanley has been good at) and will therefore continue to benefit from a recovering economy. There may be choppy waters ahead but the second half has started well and the shares, just ahead of where they were when we said buy in February, offer value at 7.9 times forecast full-year earnings. Keep buying.
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