Investment Column: Steering clear is the best policy at Admiral

Carillion; Derwent London

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The Independent Online

Our view: Avoid

Share price: 1,353p (-182p)

Admiral's shares suffered yesterday. The company reported high headline numbers: first-half profits of £16.6m were 27 per cent ahead of the same period last year, while turnover rose by 53 per cent to £1.1bn.

But some analysts expected better for the shares to justify their lofty rating. Their main worry was the cost of big personal injury claims from prior years, which appear to have increased considerably.

To be fair, the company said that these sorts of claims do sometimes unexpectedly increase, but the news caused a flutter in the market given this was a bullet Admiral appeared to have dodged.

Still, Admiral's underwriting is solid, with a combined ratio of something "in the low 80s" expected for the full year. That means that for every £1 in premiums, Admiral expects to pay out something under 85p in costs and claims. Good by industry standards.

The price comparison website, which had been hit by its rivals' meerkats and opera singers, has started to hold its own. But the ad spend increased sharply. So while turnover was up, profits were down.

We worry about Admiral. This column's own experience suggests renewal notices aren't always sent out correctly, which could lead to customers facing heavy fines. Not good for a company's reputation.

And while Admiral's costs came down because it has grown and volumes have increased, questions remain over whether it can continue its impressive growth.

We said avoid back in March, with the shares at 1,665p. That has proved to be sound advice. However, even after their recent falls, the shares still trade at 17 times full-year earnings.

Given that premium prices are slowing and the increase in those injury claims, the fact that the company is going to find it tough to maintain its growth levels, and our concerns over service, the shares are too pricey.


Our view: Buy

Share price: 323p (+11.7p)

Carillion, the building and support services group, is something of a jack of all trades. If you need transport to a hospital, it often provides the ambulance, maintains the roads down which you travel, employs the porters who get you to the clinic and, finally, the people who keep that clinic clean.

Yesterday's interims were ahead of some analysts' expectations, with first-half pre-tax profits coming in at £72.5m, 10 per cent ahead of the first six months of last year. The company had already flagged that it was doing rather well and expects to meet full- year forecasts.

It has an order book (confirmed and probable) of £19.4bn and plenty of outsourcing opportunities. Businesses in the Middle East and Canada will provide good international reach. Chief Executive John McDonough will retire at the end of the year, but the company will replace him with current Chief Operating Officer Richard Howson.

That sort of seamless succession process speaks of a well-run company. We said buy in March at 357.4p. The shares were trading ahead of that up until the recent financial turmoil.

Along with the good results, the company also appears to be in good financial health, with relatively little in the way of borrowings. Moreover, the shares are now trading at just 7.5 times the forecast earnings, with a very respectable prospective yield of 5.3 per cent. That's far too cheap for a business that boasts a rapidly growing pipeline and good opportunities.

Derwent London

Our view: Buy

Share price: 1,570p (+15p)

You would never have guessed from its name, but while many property companies may be sensitive to the state of the market across the country, Derwent London is only really bothered with how the capital is doing.

And the answer to that, at least according to yesterday's half-yearly results, is pretty well indeed. As well as a 10 per cent jump in its net asset value, the largest of all the central London-focused real estate investment trusts revealed that it had made new lettings in the period worth £8.5m in annual income, already more than it managed during the whole of 2010.

The group's impressive figures were driven by demand for its offices in the West End, and although it did make some cautious noises over the economic outlook, importantly it said it had not yet seen signs of a slowdown in the area. Its shares may have more than tripled since 2009, but the results suggest that there is more to come.