Investment Column: US move distracts from Pru's Asian gains
Bovis Homes; Firstgroup
Thursday 12 May 2011
Our view: Hold
Share price: 765p (-5p)
It's not often a company says it wants to slow down a booming business but that's what Prudential said about its US Jackson Life operation yesterday.
US new business profit rose 26 per cent to £220m in the first quarter, making Jackson the main driver of the group's forecast-beating 17 per cent profit increase to £498m. Lack of competition from Jackson's damaged US rivals and demand from baby boomers for protected savings products were the reasons for the boost in sales.
In its trading statement, the Pru said it would "monitor developments in this market with a clear focus on profitability rather than market share". But Tidjane Thiam, Prudential's chief executive, went further and said the business was getting too big, threatening to unbalance the group.
Mr Thiam said Jackson would tweak its popular variable annuities in the hope that the growth would slow down. That's a shame for the US baby boomers who have flocked to the product – and it's also a reason for caution on Prudential.
It was only in March that the life insurer trumpeted the growth opportunities presented by the 10,000 Americans who retire every day.
If Jackson is reined in, that will probably slow down Prudential's overall growth while reducing medium-term cash generation from the US.
And anyway, wasn't the Pru meant to be a play on fast-growing Asian markets? That, after all, was why Mr Thiam risked losing his job with his aborted bid for AIA in Asia.
To be fair, Asia was still going great guns in the first quarter. New business profit increased 16 per cent to £213m and the Pru said it was on track to double Asian profit from 2009 by 2013.
Mr Thiam held on to his job by showing he could drive Prudential's existing businesses after the costly AIA débâcle and he will no doubt be mindful of keeping up the good work.
Prudential remains a great long-run investment in Asia's economic and demographic strengths but for those with a shorter horizon the US may prove something of a distraction. That may hold back the shares, we think. So, while this still a great story, it's not one that we would buy into right now.
Our view: Hold
Share price: 454.7p (+16.4p)
Bovis and Barratt Developments reported results yesterday, painting a fairly optimistic picture for the housing industry, with forecasts that sales would pick up throughout the year.
Bovis reported a higher average private sales rate, and a strong land bank which bodes well for the future. The balance sheet is also strong,with a net cash position which should hold to the half year.
Yet the housing market continues to operate "well below historical activity levels", according to management. And despite being welcomed by the market, some analysts chose to read yesterday's numbers as soft, as they were looking for a seasonal pick-up in the spring. Moreover, compared with some of its rivals, the update was not as strong as many would have liked, and first-half volumes are likely to be lower over a year ago. It reported pricing as flat against the first half of 2010.
Robin Hardy, an analyst at Peel Hunt, values the stock at 23 times forward earnings for 2012, which he says is "far higher" than that of the larger house builders". The rating also assumes the management's expansion plan will pay off. And while some of the fundamentals are in place we are not hugely bullish on the sector, as mortgage availability remains constrained.
Our view: Buy
Share price: 351.8p (+7.6p)
Things were not looking too positive for investors in FirstGroup last month, as the transport company's shares fell as low as 311.3p. They had been above 410p at the start of the year, but plummeted nearly 25 per cent from those heights, although a rebound of nearly 40p since then suggests a U-turn may have been successfully navigated.
Yesterday's full-year results support that view. With the headlines dominated by the news it will bid for the new 15-year Greater Western rail franchise rather than extending its First Great Western contract by three years, the transport group said passenger revenues were rising at its UK rail unit, while its bus operations has also performed well.
The biggest drag came from its US school bus business First Student, but it did reveal a recovery plan costing nearly £40m, and any signs that this is working could prove a major catalyst to FirstGroup's shares.
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