The Investment Column: Diversity is best policy for Hiscox in risky business

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The Independent Online


Our view: Hold

Share price: 257.5p (+1p)

If you think you are about to be kidnapped, it might be prudent to take out insurance to cover the ransom. The market leader in this area is Hiscox, but while kidnap cover might not be necessary for the average investor, the group says that it is its diversity that makes it attractive to buyers.

The kidnap and fine art businesses are the ones that attract the headlines, but the insurer's group finance director, Stuart Bridges, says that it is the company's exposure to regional, retail and big-ticket sectors that has set it apart from its peers. Rivals have been hit hard in recent months as a result of last summer's floods and cyclone Emma in January, but Mr Bridges reckons that Hiscox's start to the year has been"benign". Sadly, that has not stopped the stock sliding 11 per cent this year, and despite claiming a solid start to 2008, analysts say that the group has underperformed the market.

In a market update issued yesterday, Hiscox reported that the group's trading was in line with its peer group, with written premiums down 10 per cent in the first quarter, offset by growthin the retail business.

Analysts at Numis, who have a hold recommendation on the stock, say the group has a middle-of-the-road valuation, with earnings at 1.3 times net tangible assets. This compares with 1.55 times for rivals Beazley and 0.95 times for Lancashire Insurance and Brit Insurance. Numis also highlights the fact that Hiscox has bought back £100m of bank debt using free cash, which can only be good for existing investors.

Watchers at UBS make the rather obvious point that the group has exposure to catastrophic risks, which they say "tend to be large and unpredictable". However the strength of Hiscox is the multitude of areas it operates in, and that should offer comfort to buyers of the stock. The only problem is that at present Hiscox appears to be fairly valued, and it is difficult to see where additional momentum will come from. Existing investors need have few concerns, but for those considering a buy, there may be juicier alternatives elsewhere. Hold.

Stobart Group

Our view: Buy

Share price: 142.5p (-2.5p)

One thing that investors should always look for when considering whether to buy a new stock is how much of the company is owned by the management. There are gimmicks aplenty to try to convince buyers to part with their money, but one inalienable truth is that company executives are not going to risk their own nest eggs on a ship they think could sink.

Following this analogy, investors should feel pretty happy about Stobart Group. The chief executive Andrew Tinkler himself holds about 20 per cent of the company, which was formed last year when the haulage group Eddie Stobart merged with the property investment firm Westbury. Since the merger, under which the group has decided to sell most of its property portfolio, the company has boosted its haulage business by buying rivals such as James Irlam and WA Developments. Incidentally, Mr Tinkler says Stobart will not buy TDC, despite acquiring its Irish divisionthis year.

The group operates what it says is a different business model to most of its rivals. By offering a pay-as-you-go system for customers, Stobart aims to utilise its vehicles as much as possible, and cut the number of empty journeys. Mr Tinkler says he is not too concerned by the price of fuel as the group has a surcharge system in place allowing oil costs to be passed to customers. However, he concedes that further hikes will put pressure on the group's clients.

The company issued its inaugural full-year figures yesterday, showing that pre-tax profits were £3.5m for the 14 months to the end of February. Revenues were £108.8m.

Analysts at Investec say that earnings per share will grow by 7.3p this year, a slight premium to its pan-European peer group. However, this premium could well be justified if Stobart's move into ports logistics, hitherto a tiny part of the business, grows as the company hopes. It is early days for Stobart, and with no comparative numbers to look at it is difficult to see exactly how it is doing. However, the group seems well-placed with a defensive business model. Buy.

Southern CrossHealthcare

Our view: Buy

Share price: 361.5p (+24.75p)

The United Kingdom has an increasingly ageing population, and that has to be good for the providers of homes for the elderly. That makes Southern Cross, which operates a total of 37,321 beds across the country, a defensive stock that should encourage those worried about being exposed to credit crunches.

The company specialises in caring for those with dementia, and operates in a fairly unconsolidated industry. The group's aim is to grow by acquisition, and as well as buying large care home groups, such as the UK's fifth biggest operator, Craegmoor, which Southern Cross said it would like to buy yesterday, the company also targets smaller companies.

Results for the half year to the end of March published yesterday show that the group's weekly fee, 70 per cent of which is paid by the Government, is up 6 per cent. Revenues were up 28.2 per cent to £431.2m.

Analysts queued up yesterday to recommend a buy. "We believe that the current share price does not reflect Southern Cross's defensive characteristics and medium-term growth potential. The stock remains on our conviction buy list," say those at Goldman Sachs.