Saga
Cash generated in half £143m
When you have a brand that commands loyalty among a large chunk of the population, it makes sense to extend it into as many areas as you can. This, after all, is what Sir Richard Branson has done — and, despite many reverses, it hasn’t done him any harm.
Saga, which floated in May in one of the less successful market debuts, has set out three more potential areas for growth, all of which rely on the trust in which it is held by the prosperous over-50s. The first is an agreement with Rangeford Holdings, which develops retirement villages, to market one, in Wiltshire, with the option of providing services there in due course.
The second is to buy into an existing wealth management business, probably one of the larger ones, using the Saga name to sell to the group’s database of 10.6 million potential customers.
The third is to build on its nascent healthcare services business, which serves local health authorities, by moving into more lucrative private services. This last was the weak point in the first set of interim figures (to the end of July) since the float, local budgets being under pressure.
The outperformer was motor insurance. This is also a challenging market, but Saga had the advantage of a reduction in the number of large claims and cautious marketing, the number of core policies sold being off 7 per cent year-on-year. The combined operating ratio in motor insurance, the main metric, came in at a reassuring 92 per cent.
The numbers contained few surprises, to be expected given how recently the prospectus was issued. Operating profits, on a strictly like-for-like basis, came in up by 15 per cent at £110 million.
The shares were floated at 185p. right at the bottom of the original range, and in the main have languished below this, closing up 2½p at 174¾p last night. That strong brand recognition meant that more than 200,000 retail investors took the shares. They might as well stay in until next May, when they get their free one-for-twenty share. For others, a price earnings multiple of 14 and a prospective yield of 3.5 per cent on a full dividend payment next year does not look that compelling.
My advice Hold/avoid
Why Existing investors should hang on for next spring’s bonus share. Otherwise, with dividends still months off, nothing to go for now
Icap
Revenues 15% lower on reported basis
Michael Spencer has been caught out before. The chief executive of Icap has suggested that some activity may be returning to derivatives markets that have been quiescent for two or more years, and has been wrong. He was very careful, therefore, not to call an increase in trading in September anything more than something to be “guardedly optimistic” about.
Logically, there should be some volatility returning to foreign exchange and interest rate derivatives. The central banks are at last diverging, with the United States and looking to an increase in rates while the European Central Bank is heading for a form of quantitative easing.
So revenues for the first half to the end of September may have been off by 15 per cent, but this is an improvement on the 19 per cent in the first quarter.
Saily volumes at Icap’s EBS forex market broke through the $100 billion barrier for the first time in a year. Its shares have been strong over the past month or so and, off 8½p at 387¼p, sell on 11.5 times earnings.
This still looks too early to take a position. Best avoided except by serious optimists.
My advice Best avoided
Why It looks too early to call a recovery in its markets
Melrose Industries
Purchase price for Eclipse $158m
There has been a degree of disappointment that Melrose Industries has failed to pull off another mega-purchase and this has served as a drag on the shares all summer.
This is unfair; the company’s model is to buy, improve and sell for a profit and it has been highly disciplined in not paying too much. Several deals, therefore, have been rejected because someone else was offering too much. It is a sellers’ market, with private equity buyers forcing up prices. Investors, therefore, will have to content themselves with a bolt-on to the Elster business bought in 2012. Melrose is buying Eclipse — a family owned business based in Ilinois that makes components and systems for industrial heating and drying — for $158 million.
This fits well with the industrial side of Elster, which is better known for making domestic meters. Eclipse’s margins can be brought up to the 25 per cent target and, once it is integrated, the deal will boost the price at which Elster finally is sold.
As to disposals, three are in prospect: the Elster water meter business; Bridon, the industrial ropemarker; and Brush, which makes turbine generators. One senses, though, that nothing is imminent and any deals will have to wait until well into next year — as, indeed, will the resulting return of capital to investors.
All this could change overnight, with one phone call. Melrose shares, up 10¼p at 247¾p, sell on 16 times earnings. Not cheap, but the rewards will be there for those prepared to be patient.
My advice Long-term buy
Why Rewards will come from disposals next year
And finally ...
A bold move for Consort Medical, where most of the attention has been on Oxette, a cigarette alternative that has just gained regulatory approval. The company is paying £230 million for Aesica, which makes drugs on behalf of Big Pharma, and there is a £95 million rights issue at a 34 per cent discount to the previous share price. Consort makes delivery systems and there is the prospect that eventually Aesica’s products will go into these. The value of the deal is not far short of Consort’s market cap.
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