The Investment Column : Worrying flights of fancy on display at Guardian Royal
Wednesday 26 February 1997
Indeed, he went as far as giving a list of target areas, which rattled a market that normally prefers cash in the hand to the flights of fancy by their corporate leaders. So the shares slipped 4.5p to 283.5p yesterday despite results at the top end of predictions.
Mr Robins is looking at life and health insurance and direct sales operations in the UK and is toying with a couple of possible acquisitions in the US. The share price reaction was the clearest demonstration of the niggling worries the City still has about GRE, especially if it buys a life business, which would require a goodwill write-off. It does not trust the company with a blank cheque for up to pounds 1.25bn, the outlay the company could afford from its own resources. This includes pounds 500m of cash and pounds 750m in new debt which could be loaded on to an ungeared balance sheet.
A fresh management and a determined and largely successful attempt in the last few years to catch up with the techniques of the late 20th century insurance industry, including direct selling, has not entirely overcome the memory of the dud acquisitions of the late 1980s. GRE lost a packet in Italy and overpaid for a takeover in Ireland.
Restructuring, which cost pounds 39m last year, has produced a streamlined UK business from a hotch-potch of companies, including the recently acquired general insurance business of Legal & General. Mr Robins described this as an internal merger, whose benefits would pay for the restructuring cost within two years.
Trading profits - excluding restructuring charges and the volatile investment returns, which are the other component of pre-tax profits - sank to pounds 281m from pounds 340m a year earlier. But this was expected, after a year of price wars in a downward-turning insurance cycle. The embedded value of the life business, published for the first time, came in near the top of forecasts at pounds 302m.
Assuming a 10 per cent rise in this year's dividend to 11p, the forward yield of 4.8 per cent puts the shares on around a 15 per cent premium to the sector. Even so, and despite their sharp recent rise, they still trade at a discount to net asset value of about 8 per cent, against a premium of around 10 per cent for most insurers. This may reflect the residual suspicion surrounding the company and the absence of any obvious bidders.
For those prepared to forget the past, the shares do not look expensive. But at this stage of the insurance cycle they are no more than a hold.
The only consolation for holders of EMI shares is that they have not done as badly as those of Thorn in the wake of the long-heralded split of Thorn EMI into its separate music and rental businesses last August. That divorce has proved a pretty poor investment of lavish advisers' fees, with EMI having lost over a quarter of its value against the market since then and Thorn plunging by a massive 57 per cent against the FTSE all- share index.
On the face of it, yesterday's figures from EMI, showing profits slashed from pounds 373m to pounds 326m in the nine months to December, justified the market's jaundiced reaction. Last year was not a good one to be in the records business.
The pound's strength shaved pounds 16m from an operating profit that sank from pounds 332m to pounds 306m and the company warned the full-year effect could be nearer pounds 25m. Meanwhile, after an exceptional period for new record releases in the third quarter of 1995, this year the bonanza has been deferred to the final quarter. But EMI is not short of talent, led by the ubiquitous Spice Girls, who are ready to seriously rival the Beatles, with 7 million album sales to their name so far and singles hits in 32 countries. Not to be outdone, the Beatles three-volume anthology has sold 13 million double albums. The full year will include releases from Blur and Mansun, who have already come straight in at number one in the UK.
The third-quarter problems were well telegraphed to the market and are containable. Analysts reckon the currency hit next year will be below pounds 20m, for instance. More serious is the continuing dire state of US music retailing, which has suffered from over-expansion and cut-throat competition. EMI has provided over $8m for the move into Chapter 11 of Camelot, one of the chains, and if Musicland, the US equivalent of Our Price, follows suit, the hit could be upwards of pounds 10m.
In the long run, the market for recorded music may resume the 7 per cent or more growth typical of a few years ago, while penetration of CDs in western markets is still below 50 per cent. But underlying profits of pounds 380m for the full year would put the shares, up 4.5p at pounds 11.975, on a forward multiple of 23. High enough.
Wimpey builds on swap
Exchanging its minerals and construction business for Tarmac's McLean Homes 12 months ago has proved a good swap for George Wimpey. Operating profits rose by 55 per cent to pounds 51.7m in 1996, making it the best year for the housebuilder since 1990. Pre-tax profits doubled to pounds 31.5m and McLean is already making 14 per cent on capital employed, replacing the 5 per cent achieved on the business offloaded. Earnings per share of 5.8p cover the unchanged dividend of 5.5p, the first time for two years, while gearing only rose from 33 to 39 per cent, and is on the way down again.
Despite the good news, 1996 was an average year. Selling prices rose as a result of an improvement in product mix. UK house completions fell 11 per cent. Chairman and chief executive Joe Dwyer admits Wimpey's own product mix has been looking rather tired. The drop in government funding cut social housing completions by a third.
McLean Homes, which concentrates on four-bedroom detached homes, dipped only 3 per cent in spite of Wimpey stopping the McLean custom of cutting prices to push through completions just before the year-end. Meanwhile, Morrison Homes in the US remains in the red and profits on sales of surplus assets were absorbed by restructuring costs.
The current upturn in the housing market is strongest inside the M25 where Wimpey is weakest. Overall, it is not expecting to raise the number of completions this year, although Mr Dwyer thinks prices might rise by 5 per cent.
Profit estimates for this year range from pounds 40m to pounds 60m. Much will depend on progress in selling off a further pounds 88m worth of surplus assets, how well the updated styles sell, and how long the housing recovery lasts. The shares, down 1.5p at 140p, sell on around 15 times future earnings. Hold.
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