Chaucer's underwriting reads like a sorry tale

Speedy Hire's tooled up for more growth; Chaucer's underwriting reads like a sorry tale

Canary Wharf appeared for a short while to have established itself as the quality play in the property sector, but over the past few months, things have gone horribly wrong.

When we wrote about the group last September it appeared to have a lot going for it – not least the promise to return £2bn to shareholders and the apparent security of its tenants. The group, developer of east London's Docklands, had made out it is recession-resilient because blue-chip tenants sign up for 25 years.

However, it turns out the company provided what might generously be called "less than full disclosure" – and it has been punished very heavily by the market as a consequence. The company shocked investors last month with the news that vacancy rates could rise a lot higher than expected because some of the large new tenants had clauses in their leases which allowed them to "put back" part of the space (625,000 sq ft, to be exact) to Canary Wharf. That's a lot of empty floorspace the group could have to find new occupants for in an economic downturn.

Canary Wharf already has 1 million sq ft of existing or soon to be completed accommodation which is yet to be let. The vacancy rate could jump from 6.7 per cent to 11 per cent over the next two years. The value of the estate was also marked down by 20 per cent at last month's interim results and no one is yet predicting we have found the bottom for office valuations. With lots of new building work coming on stream in central London, there is a big hike in capacity at just the wrong time.

Canary Wharf shares have collapsed and it is about to be ejected from the FTSE 100. Some analysts now even believe that the return of capital is in danger, as it requires large-scale securitisations which will be difficult and expensive with investor sentiment so poor.

Canary Wharf shares fell a further 5 per cent to 148p yesterday. That's such a long way off the company's declared "net realisable value" of 563p a share, but the discount to net asset value, the more conventional measure, does not appear too much wider than the sector average. With the economy against it, investors should stay away from a company that has the capacity to spring such nasty surprises.

Speedy Hire's tooled up for more growth

Speedy Hire does what it says on the toolbox: it hires out ladders, drills, cement mixers, pumps, things that look like participants in Wacky Races (look at the website), spades, portaloos, saws ... you name it.

It is the biggest player in the fragmented small tools hire market, and it has big plans to expand from its current 250 depots across the UK to 400, including 30 new openings this year. This expansion comes on top of market share gains at its existing depots, where sales growth has been 7 per cent in the 11 months to the end of February. That compares to roughly 4 per cent growth at other quoted small tool hire groups to have reported their trading figures in recent months.

Speedy Hire's trading update yesterday said demand has remained solid, despite fears that its exposure to the construction market might prove a bind in a slowing economy. Full-year results due in June will be in line with expectations, it said.

Tool hire continues to be a growth business, as contractors prefer to borrow much of what they need to give them greater financial flexibility. The prospects are not fully reflected in the Speedy Hire share price, which was down 5.5p to 271.5p yesterday. On earnings forecasts from Numis, the shares trade on 9 times for the year just ended, falling to 7.5 next year. Buy.

Chaucer's underwriting reads like a sorry tale

Martin Gilbert, who in another life is the embattled chief executive of the split-cap fund manager Aberdeen Asset Management, has also had a tumultuous time as chairman of Chaucer, the Lloyd's of London insurance underwriter.

The group underwrites marine, aviation and motor insurance, among other things, but has been one of the more disappointing companies in the sector as far as equity investors have been concerned. The company has a riskier, more highly-geared balance sheet than its bigger rivals, and its underwriting record in recent years has been poor.

It wants to do something about the stretched balance sheet, and has launched a placing and open offer to raise £40m. That would boost the size of the company, capitalised at just £77m now, but it is a moot point whether this will be enough to assuage its customers nerves (since the World Trade Centre losses, they really want their underwriters to be as big and robust as possible).

Chaucer plans to increase its underwriting at Lloyd's, particularly in marine insurance, where premiums are still rising fast. In other areas, high premiums will no doubt last for a year or two yet, so there are the opportunities to take on extra profitable insurance business. Chaucer's preferred method is to buy out other members of its Lloyd's syndicates, including individual names.

Chaucer returned to the black in 2002 and has also re-established the dividend. This gives the shares a yield of just under 5 per cent, just over if you take up the open offer at 32p.

The dividend, though, is always at medium-term risk in the cyclical insurance industry. And the poor record, the lack of scale and the overhang of Brit Insurance's big shareholding will conspire to limit capital gains. This Chaucer's tale is not a good read.