CGNU proves big is beautiful

Chemring; Thorntons

Insurance is a game where big is beautiful and CGNU is certainly substantial.

Yesterday, it proved it is turning its size to its advantage, beating forecasts on new business sales. There was a 10 per cent per cent rise in global sales to £15bn in 2001, with a particularly strong fourth quarter where sales rose 21 per cent to £4.5bn worldwide. CGNU shares rose 5 per cent to 874p.

Britain's biggest insurer, which was created just over a year ago from a merger of Norwich Union and CGU, has had a busy year restructuring the business. It has abandoned the international markets where it is not in the top five and has embarked on aggressive expansion in areas where it sees potential for growth. So far, this has been in continental Europe, where CGNU signed a string of deals to distribute its products through high street banks in France, Spain and Italy. Soon, more than half its new business will come from outside the UK.

Europeans have less insurance than Britons and markets such as the Far East are feasts yet to be had. CGNU has set up an Asian operation, although it will have to fight hard to catch up its arch rival Prudential there and in the US.

In Britain the company had a strong year under its Norwich Union brand, notching up a third more life and pensions business and achieving its target of a 20 per cent market share of new low-cost stakeholder pensions.

CGNU itself sounded a note of caution. The UK business was boosted by the launch of stakeholders and the flight to strength by consumers panicked by the Equitable Life collapse. Next year is unlikely to be as easy, and the company will also have to grapple with potential distribution problems amid changes to the regulatory regime. But these problems will be common to all UK life insurers and CGNU looks cheap compared with its peers. The company is rated at 1.5 times embedded value – the equivalent of net asset value – compared with Prudential's 2.1 times and an industry average of 1.6 times. Buy.

Chemring

Chemring, which makes military hardware such as missile decoys and flares, was choosing its words tactfully yesterday: "The unfortunate events of 11 September and the military action that followed, it said, inevitably give rise to assumptions that such actions would be 'good' for our business. To date, limited additional business has resulted, although there are increasing signs that a reappraisal of military requirements following 11 September, particularly in the United States, will be beneficial to our future prospects."

Indeed. The company looks set to continue growing at 20-odd per cent annually, and the US market is becoming much more important for the group. Figures yesterday revealed that the US government now accounts for a quarter of sales.

Profits for the year to 31 October were £9.4m, up from £7.1m, on turnover up from £67.2m to £95.2m.

A good proportion of the growth came from Kilgore, the US maker of infra-red decoys which Chemring bought last February. The purchase has not been without its costs, though, since old-fashioned working practices contributed to a fire and the death of a worker last April. A new state-of-the-art factory is being fitted, but the insurers are still refusing to pay the full claim.

Although David Evans, chief executive, was playing down the chance Chemring will receive no more money, the fact it has already assumed additional compensation in its accounts leaves the group a little exposed. The decision to set aside cash in a self-insurance vehicle rather than stump up for increased insurance premiums has also raised the risk profile.

The group generates plenty of cash, though, and has a secure pipeline of defence contracts. The shares jumped 8.5p to 385p yesterday.

On a price-earnings multiple of 12, the stock is in line with the average of European defence contractors. But its US success and better growth rates means it ought to trade higher. The company's value recently topped £100m and its shares were promoted to the FTSE All-Share index, which should help liquidity. Buy.

Thorntons

Thorntons, the chocolate maker and retailer, proved a tasty investment last year, as a new management tackled the mess left after the company over-expanded. But a share price rise of 50 per cent doesn't look entirely justified by current trading. Christmas like-for-like sales were up 8 per cent, but outside the festive period they were sliding.

The company still needs to show it can get more people into its shops. It is also early days in its bid to raise royalty revenues from licensing its brand name to other manufacturers. At 103p, and on 15 times Deutsche Bank's forecast of this year's earnings, the shares are too high.