The motor insurance market has been almost impossible to make money out of for about as long as I can remember. Investors in esure, then, owner of the Sheilas’ Wheels brand, will be well aware of this. Esure shares were floated at 290p in March 2013 and have struggled to stay above this level since; they lost another 25½p to 240p after halfway figures that were no worse than they should have been.
Esure warned not long after floating that the market was a difficult one. There is little sign of any improvement, although the company says it is making every effort not to write unprofitable business. The combined operating ratio, the main measure of performance for insurers and the difference between money out in claims and money in in premiums, rose to 95.8 per cent in the half-year to the end of June, from 90.9 per cent last time.
This is mainly a function of the repayment of earlier reserves, money that was thought to be due but was not. Claims, though, are being inflated by the return of whiplash injuries and by macroeconomic trends, a rise in the sheer number of miles being driven by the cars that esure insures. The company admits that the market is not getting any better and further rate increases will have to be shoved through — its main rivals are having an equally difficult time, to judge from recent trading statements.
In March the company bought the other half of Gocompare, the comparison website promoted by that irritating opera singer. Esure thinks it can double earnings there, from about £25 million a year, over the next five years, in part by cutting out £2 million of costs, but this will require investment. That combined operating ratio is not going to look a lot prettier by the end of the year.
Esure is a difficult share to evaluate because it is an income stock and dividends are hard to forecast. The company has paid out an interim of 4.2p, which is comprised of half of all earnings per share plus a special payment; analysts think that this year’s payment will be about 15p.
This puts the shares on a forward yield of above 6 per cent, which is attractive enough, but I see no other compelling reason to buy.
Gross written premiums £275.5m
MY ADVICE Avoid for now
WHY Dividend flow is hard to predict, while the motor insurance market will remain difficult for the appreciable future
I did rather suggest the other day that things were moving around fast in the aerospace industry. Along come two deals that suggest consolidation is, indeed, picking up in the sector.
Warren Buffett’s Berkshire Hathaway has bought Precision Castparts, an American maker of aircraft components, for $37 billion. Meggitt, meanwhile, has paid $200 million for the advanced composites business of Cobham.
This is not a particularly significant business for Cobham, but it adds to Meggitt’s existing operation and is being acquired on a multiple of ten times’ earnings that is attractive enough.
The aerospace sector is doing such deals for two reasons. One is that components makers are having to invest heavily in supplying the new range of aircraft that are taking to the skies in the next few years — Meggitt will supply the Airbus A320neo replacement and the F-35 Joint Strike Fighter. Second, aircraft manufacturers prefer to deal with a limited number of suppliers. Cobham’s business integrates well enough with Meggitt’s existing operations. What is unusual is that the deal is being funded out of debt, which has been renegotiated, and will not derail the company’s shares buyback programme, worth £230 million to £270 million.
Meggitt surprised the market last week with better-than-expected halfway numbers, as did Cobham, and the shares have reacted accordingly. They were up another 5p to 509½p yesterday, but, on 14 times this year’s earnings, they still warrant a “buy”.
Cost of Cobham deal $200m
MY ADVICE Buy
WHY Further consolidation in aerospace is to be expected
When Rockhopper, the oil explorer best known for its interests north of the Falkland Islands, bought Mediterranean Oil & Gas last autumn, it was seen as a cheap purchase. For the vendor, it was a good exit, given its lack of funds to develop its Italian wells.
Now Rockhopper has bought further production in Egypt from another company that does not wish to persevere. Beach Energy is also selling its assets in Romania and will focus on its Australian operations.
Rockhopper is getting a good price for two concessions in Egypt. This is not the easiest country to get the money out of, as BG Group shareholders will be only too aware, but the wells are being operated by the Kuwaitis and the political risk looks minimal. Rockhopper is paying the equivalent of less than $4.50 a barrel and this and its producing assets in Italy will fund the company’s running costs henceforth.
The company will decide in a few weeks how to progress those Falklands interests. So far the omens have been good, with two decent discoveries, but there is too much uncertainty to rate the shares, off 3p at 58p, as a “buy”.
Purchase price $22m
MY ADVICE Avoid
WHY A sensible deal, but hard to see any upside
And finally . . .
A brave call from RBC Capital Markets, which has Balfour Beatty as an “outperform”. There is an update on the business tomorrow from Leo Quinn, the newish chief executive, after seven profit warnings. Seven? Apparently, but the broker is prepared to bet that there will not be another one soon. RBC admits that there is still a question mark over the American business, but thinks that problems should be “containable” from now on. Hmm. The shares are up by two thirds since October. I would not be jumping in myself.
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