Investment Column: The Pru's shares have fallen, so buy in now

Carpetright; Rugby Estates
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The Independent Online

Our view: Buy

Share price: 550.5p (-60p)

Prudential took a bit of a battering on the stock market yesterday, and it was a rough way to welcome Tidjane Thiam, who was presenting his first financial results since taking the top job. In fact the company was the biggest faller on the FTSE 100. Fair? On the face of it, a 9 per cent fall in third-quarter sales to £700m (and a 9 per cent fall over the first three quarters to £2.2bn) doesn't look all that good.

But before writing off the financial services group, it is worth looking behind the numbers. Weakness in the UK, where sales fell by an alarming 22 per cent, was the main reason for the decline. However, the comparable period was boosted by a big bulk deal with Cable & Wireless. Prudential has been avoiding such deals recently because the margins are disappointing. At the same time its business in the US, where many rivals are finding life awkward, is doing much better, and Asia is showing signs of returning to growth. Eight of the Pru's 12 markets are now back in positive territory, according to Mr Thiam.

It is also a mistake to concentrate solely on sales. It's no good selling if you don't make money from the business you put on your books (something it has taken the insurance industry a long time to learn). Prudential has focused attention and capital on profitable lines and faster-growing US and Asian markets at the expense of the UK, which is effectively a cash cow that helps fund them.

Again, the strategy looks sound. The Pru holds 2.4 times the level of capital required by regulators, while the fund manager M&G is adding business. MF Global estimates an embedded value for Pru of 650p a share. That means it trades at a sizeable discount, although it does enjoy a higher rating than UK-listed rivals. With a respectable prospective yield of 4 per cent and attractive growth prospects, we say the shares' fall is a strong buying opportunity.

Carpetright

Our view: Hold

Share price: 886 (-14p)

Carpetright's share price has soared by nearly 60 per cent since its preliminary results at the end of June. Back then, we took a cautious approach to the floor covering retailer's shares, as there was limited visibility on the UK housing market. Since then, house prices and mortgage approvals have improved, while its biggest rival Allied Carpets started shedding stores (a whopping 166 went in July) – placing £140m up of business for grabs. These factors contributed to Carpetright's buoyant second-quarter sales, and it expects half-year profits to be ahead of expectations. In the UK and Republic of Ireland, Carpetright's like-for-like sales rose by 5.6 per cent, a marked improvement on the first quarter.

The chain has also done plenty to generate new sales, signing three big contracts (two with Lloyds Banking Group) to sell house contents insurance. It has completed a deal to supply carpets to the housebuilder Redrow and is talking to other players. Furthermore, Carpetright reckons that even if monthly mortgage approvals bump along at the historically low level of 38,000 seen in August, underlying sales could grow by 12 per cent in the second half. Given this, we remain firm long-term buyers of Carpetright shares. But as they now trade on a 2010 multiple of 23.7, compared to 13.4 for the retail sector, we say hold for the next six months.

Rugby Estates

Our view: Buy

Share price: 246p (unchanged)

The property and asset management group Rugby Estates struck an optimistic note with its interim results yesterday. It said the unprecedented fall in commercial property values over the past two years seemed to have "bottomed out", while investor demand was driving capital values higher in some parts of the market. Demand for vacant properties is "generally reasonable", Rugby said, and it had not experienced widespread rent defaults by its tenants.

Moreover, there are two parts to this company: Rugby Capital, which manages the group's directly-owned property portfolio, and the asset management division. The plan is to realise capital from the former and return it to shareholders. So far this year, the policy has yielded 50p per share and, at the end of July, its cash balance was £4.3m with no debt

Of course, with Rugby's shares up by about 25 per cent since the January, cautious investors may still wonder whether it is worth piling in. We think it is. Rugby has been strong, but the wider market has been stronger. If there is a market correction, it will hit speculative plays more than Rugby, and when the dust settles the stock should perform while others suffer.

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