Investment Column: Unemployment pain can be Regus's gain
Cairn Energy; Admiral
Wednesday 26 August 2009
Our view: Buy
Share price: 96p (+12.5p)
The recession appears to be moderating – we can all argue about what shape the recovery might take, and how strong it will be, but by the end of this quarter more than half the globe should be back into positive growth.
Less happily, unemployment, a lag indicator, is still forecast to rise in advanced economies such as the UK and the US. This appears to bode ill for Regus, which provides serviced offices. Surely, more people out of work equals slacker demand for workplaces? Not quite.
In the City of London, for example, where occupancy levels remain high, the company is benefiting from the ingenuity of highly skilled professionals who now find themselves out of work. Start-ups and those suddenly forced to work from home are opting for its products, which are cheaper than the alternative. Setting up your own office from scratch, with all the attendant bills, is pricier than paying Regus to do the heavy lifting.
In the US, to capitalise on the trend towards flexible working, the company has set up shop deep in the suburbs and shopping malls, enticing home workers from their bedrooms or living rooms down the street.
This is not to say that Regus hasn't been affected by the travails of the economy. It has seen a higher rate of churn, as clients downsize or go out of business. But at the same time, it has also attracted the interest of companies seeking to reduce fixed costs.
This, moreover, is only half the story. With operations around the world, Regus is well-positioned to capitalise on the strength in emerging markets. Cash generation is strong, and after a period of modest growth it wants to use the resources to expand. And although it remains cautious on the outlook, its decision yesterday to hike its interim dividend by 33.3 per cent is a sure sign of confidence. Buy.
Our view: Buy
Share price: 2586p (-37p)
Five years after discovering the Mangla oil field in the north-west of India, Cairn Energy will commence production this week. That's the good news. Less positively, the end-of-year target for completing the second processing train and an associated pipeline at the site looks, says the company, "increasingly challenging".
The outlook undermined sentiment when Cairn issued its interim results, revealing a first-half loss, yesterday. The shares duly relaxed, albeit in a weak market. Notwithstanding the cautious statement, worry warts should note the clarification from the chief executive, Bill Gammell, who added: "If there is any delay it will be a matter of weeks rather than months".
Moreover, beyond India, the group has built up a strategic position offshore of Greenland. The first exploration drilling campaign is some way off, with 2011 as a target, but the size of the opportunity is "growing increasingly difficult to ignore", according to RBS analysts.
The share price, although strong compared to the lows struck in the fourth quarter of 2008, is still some way off its peak. It should rise further as the Rajasthan resource base is exploited. Given its leverage, higher oil prices – a distinct prospect if a recovery takes root in the world economy – will only smooth the path upwards. Buy.
Our view: Hold
Share price: 1044p (-28p)
Henry Engelhardt, chief executive of Admiral, summed up yesterday's half-year results in one word in a missive to staff. "Wow," he said. And to be fair to him, the interims were impressive, with strong growth in profits, record dividend payments and rising sales. Some 3,000 staff will each get free shares in the insurer worth £1,500 each.
The results were all the more impressive given the environment in which they were achieved. In the current economic climate, it has been difficult to raise premiums, but Admiral has been able to do so. Its Confused.com price comparison business, meanwhile, faces stiff competition, but is holding its own. And the investment income that Admiral earns on premiums banked has fallen as interest rates have tumbled.
Why then, did Admiral shares fall back yesterday, even after the unexpectedly generous dividend hike? The short answer is valuation. The stock has strongly outperformed its peers in recent months, and on 19 times 2010 forecast earnings, its rating fully reflects Admiral's premium status.
On that basis – and given the ongoing pressures it faces – it is difficult to recommend adding to a holding in Admiral. Some profit-taking was in evidence yesterday, but the shares remain a very solid hold.
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