Rationalisation breathes new life into Lloyds Abbey fortunes

THE INVESTMENT COLUMN

The idea behind bancassurance, that bank customers are a soft touch waiting to be sold other financial services, has never lived up to expectations and recession and regulation mean it has largely been pushed on to the financial services backburner. However, with the two main proponents of bancassurance, Lloyds Abbey Life and TSB, grouped together within the Lloyds TSB Group, the scope for rationalisation should be enormous.

Shares in Lloyds Abbey have already outperformed the rest of the market by more than a fifth since the beginning of last year, buoyed by hopes that 62 per cent shareholder Lloyds Bank (as was) would buy out the minority. Now with TSB aboard, the odds must be that discussions within Lloyds TSB will result in some of the bank's parallel life and general insurance operations being transferred to Lloyds Abbey. Even if the buyout hopes prove optimistic, that should rebound to Lloyds Abbey's benefit.

In the meantime, the life assurer's original business seem to have come back strongly from a disappointing performance in 1994. Yesterday's figures, showing pre-tax profits 31 per cent ahead to pounds 422m, beat all expectations, although analysts were wrongfooted by a change in the accounting treatment of the life companies which added pounds 10.2m to the bottom line. The comparison was also flattered by a hefty pounds 59.6m provision taken the previous year for potential claims as a result of the personal pension "mis-selling" fiasco. Underlying profits were up a more modest 10 per cent.

None the less, Lloyds Abbey clearly hit the right mark last year with its guaranteed bonds, which provided a degree of security of capital and income to financially wary consumers. It believes its new business sales outperformed a life and pensions market down 15 per cent in 1995, with Abbey Life business up 9 per cent and Black Horse Financial Services flat.

The current year will be without the bounce-back effect from 1994 and the outlook for life and pension sales is as poor as ever. But Lloyds Abbey has already taken firm action to trim costs by rationalising the sales force last year, and further benefits should flow if the TSB businesses are poured into the group. It has also proved it can still sell to independent financial intermediaries, who accounted for half Abbey Life's single premium sales last year, up from a third before.

The shares, 18p ahead at 506p, stand on a prospective multiple of 12, assuming profits hit pounds 440m this year. Earnings growth is likely to be respectable rather than explosive going forward, but a forecast yield of 5.8 per cent and the expectation of 9 per cent per annum dividend growth over the years has attractions.

Bad Fairy steals

Unilever thunder

Unilever was hoping for plaudits yesterday but found its thunder stolen by arch-rival Procter & Gamble. First, the consumer products and detergents giant announced a $770m agreed deal to buy the US hair-care company Helene Curtis. But that news was soon overshadowed when it emerged that P&G, maker of Ariel, was cutting the price of Fairy Liquid and other products to narrow the gap between the top brands and the cheaper supermarket own-labels.

Taken together, the bad news outweighed the good and Unilever's shares closed 17p lower at 1273p.

To take the good news first, the Helene Curtis deal looks promising. Unilever is a big player in the hair-care market world-wide but a tiddler in the powerful US market where P&G is king. This deal changes all that and though the price looks expensive, Unilever should be able to use its marketing muscle to improve the company's paltry returns.

The deal follows a flurry of similar acquisitions, none of them huge in the great Unilever scheme of things but useful additions in markets where the company has been under-represented. But the general picture for Unilever does not look good. P&G's aggressive noises are currently restricted to only one or two products but that may spread. The fact is that P&G has already tried this tactic with some success in other markets such as the US and Germany. It has won the US battle where its detergents market share dwarfs Unilever.

The Anglo-Dutch group now looks vulnerable if P&G puts the squeeze on in the UK and the rest of Europe. More worrying is that Unilever has used detergents to drive its expansion into markets such as Brazil, where P&G is not yet represented. That may change.

Unilever needs a shake-up. It may get it under chairman-elect Niall FitzGerald, though his involvement with the Persil Power fiasco casts doubt on how much might be achieved. Unilever has long been the safest of stocks for fund managers, who have seen it as a core holding. But with consumer spending under pressure in so many markets and with P&G getting nasty, that assurance may soon evaporate. For Unilever's full-year results next week analysts are forecasting profits of around pounds 2.45bn rising to pounds 2.7bn for the current year. Yesterday's fall leaves the shares on a rating of 15 falling to 14. With so much uncertainty that is quite high enough.

Fun times

at Vardon

One of Kingfisher's perennial gripes is the belief among posh City and media types that because they don't shop at Woolworths no one else does. The fact that hordes of people around the country swear by Woolies is lost on investors.

Arguably Vardon, the bingo, aquariums and holiday park group that grew out of an investment in the London Dungeon, suffers the same snobbery and the quality of its highly cash-generative mass-market attractions is not given the credit it should be. Figures for the year to December announced yesterday confirmed that even in difficult markets Vardon is a steady earner, operating in fragmented markets with plenty of growth potential.

Sales jumped 74 per cent to pounds 52.6m (pounds 30.2m), pre-tax profits were 24 per cent higher at pounds 9.1m and earnings per share moved a useful 7 per cent forward to 7.6p. That allowed a 20 per cent increase in the full-year dividend to 1.5p.

Those were impressive figures given the impact of the lottery, which diverted spending away from bingo, and the hot summer, which kept UK holidaymakers on the beach and out of indoor attractions such as Vardon's seaside aquariums.

But these are short-term worries and should not detract from the good investment story Vardon represents. With prodigious cash flow, all three core divisions should soon be self-sufficient in terms of organic growth. With no new diversifications planned the risky start-up phase has been safely negotiated.

In that context the slide in Vardon's share price over the past year from a high of 155p to yesterday's 120p, up 5p, provides a good opportunity. With profits for the current year forecast at about pounds 11m, the shares trade on a prospective price/earnings ratio of 13. Good value.