Our view: Buy
Share price: 564.5p (+1.5p)
National Grid is the safest of the safe. Even for a utility, it has a risk-averse investment model. At the moment, 95 per cent of its revenues are from regulated services, and even that last 5 per cent is set to come down over the coming 15 months as watchdogs in the US, where the company has half its business, change to rules. Added to that is the company's attitude to risk in its non-regulated business, such as the Isle of Grain liquefied natural gas terminal. Each phase of the project only went ahead when 20 years' worth of cash flows were locked in.
Given such certainties, it is perhaps little surprise that National Grid is trading in line with expectations, as the company said yesterday. Not only is it on track to meet performance targets for the year, but it is predicting substantial improvements in profitability in its Electricity Distribution and Generation business, and the £3.4bn investment programme is also on target. The majority of this year's £2.5bn funding requirement has already been raised, with only another £400m needed. And the company is committed to its 8 per cent dividend growth policy through to March 2012.
But, like everyone else, National Grid has had a tough time. The group's share price dropped nearly 20 per cent this year, and concerns about its £23bn debt pile – a lot of it accrued in the $7.3bn (£4.4bn) takeover of Keyspan in the US in 2007 – saw Moody's downgrade its outlook to "negative" early last year and launch a review of the group's BAA1 investment grade. Last week's confirmation that the ratings agency was taking the outlook back up to "stable" is a key development and leaves the stock undervalued. At current levels the shares trade on just 9.7 times forward earnings and yields 6.8 per cent. Given this, the improving ratings and the safely first business model, National Grid is a buy.
Our view: Buy
Share price: 105.8p (+0.8p)
Currency movements have not done any favours to Beazley, the Lloyd's insurer which yesterday reported a 55 per cent drop in half-year profit. Strip them out, however, and the profit figure shows a 51 per cent rise with the potential of more to come. Premium rates hardened during the first half and there may be continued good news over the next six months, although the gains are likely to be more moderate.
Whatever, Beazley is in a good position to capitalise because underwriting remains good. The company makes 10p on every pound of premium written after costs and claims have been accounted for. Of course, as with any insurer there are two sides to the business: the premiums and the money made from investing them. That second string makes less than happy reading and the yield from its cash and bond portfolio is falling.
Beazley has taken steps to address the issue by setting up a fund management company to manage its money more actively and improve returns from this side of the business, although it will continue to be run on the conservative side – no bad thing at present.
Barring major catastrophes – always a risk with at Lloyd's – Beazley is in a good position and should go well from here. The shares are not expensive, trading at 110 per cent of net tangible assets, a small premium that does nothing to reflect the growth that should come through over the coming months. The house broker, Numis, thinks NTA per share will rise at an annualised rate of 24 per cent over the next 18 months. All that and a forecast dividend yield of 6.7 per cent, with the payout comfortably covered by earnings. There is value in these shares and while you would not want to bet the farm on them, they should reward those willing to take the risk. Buy.
Our view: Sell
Share price: 135.0p (-2.5p)
With the markets showing signs of recovery Aberdeen Asset Management is of some interest. On the face of it, the company's numbers yesterday were nothing to write home about. Assets under management are rising, but largely because markets are rising. In terms of new business, Aberdeen is still suffering from a net outflow of funds, particularly in fixed income (although the rate of decline is down).
Things could improve dramatically if a recovery takes hold. The stock market, at least, is pricing one in, although confidence remains shaky. At least Aberdeen has managed to exert tight control on costs, and this is not a company that should easily be written off. It is just that with Singer putting it on a 2010 multiple of 14 times earnings, the shares are not cheap. The sector, by comparison, is on 12 times. Aberdeen is a company that is worth watching closely over the coming months, but given the risks, now is not the time to get involved. Sell, and look again when the price eases.
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