How many times does a blue-chip company need to warn on profits before shareholders lose faith? RSA has clocked up three formal warnings since November (two within a single week) as Britain’s biggest commercial insurer battles against a tide of bad weather claims and a financial crunch in the Republic of Ireland.
Its alert this week that it had taken more hits after a severe Canadian ice storm and the appalling weather in Britain over Christmas had at least one City analyst calling it No 4, although RSA made no specific mention of falling profits.
It has been a turbulent time for the owner of the More Than personal lines brand, which, as well as being big in Britain, is a leading player in Canada and Scandinavia. When it first alerted the market that it was facing up to £183 million in weather-related losses in the wake of near-unprecedented storms in Northern Europe and Canada, shareholders raised their eyebrows.
Yes, the weather has been terrible, but isn’t underwriting such risks what insurers do? And when a scandal over its reserving methods and the timing of accounting for premiums in Ireland blew up, the worries began to set in. An initial £68 million injection into Ireland was followed by a further £128 million. The shares collapsed in value and the sceptics began to ask if the entire group was rotten. Shares lost as much as 30 per cent of their value in the presumption that the dividend would be cut — for a second year — and, with capital in short supply, RSA would be forced to sell assets or tap shareholders for up to £500 million in a rights issue.
The shares have regained almost 10 per cent since then, not least in the wake of a report by PwC, which concluded that there were no group-wide failings in Ireland and no further emergency injections would be required, and after KPMG had confirmed that the problems there were isolated.
RSA is not in crisis, but its shares are risky. The dividend, cut by a third last February, will be reduced by at least the same amount this year. A rights issue, if pursued, would require a capital outlay or dilution, while asset sales would shrink the group and dilute earnings potential. A predatory bid from the likes of Aviva feels unlikely and would be pitched aggressively low. It is highly debateable whether all of this is factored into the share price. RSA will come through this, but the huge uncertainties about when and how mean the shares are, at best, a hold.
Emerging markets
It began last May with wobbles over US tapering. Shares in emerging market assets dived amid worries that squillions would be repatriated to the West as the Federal Reserve’s mammoth money-creation scheme started to be put into reverse.
Over the summer, many economists began to postulate that the boom in emerging markets might be over soon. Now the view that developed countries are going to do better than emerging ones has hardened into widespread received wisdom. Goldman Sachs is telling clients to pull back from emerging markets, Morgan Stanley is warning that returns will be hit by tumbles in a string of emerging market currencies, from the Russian rouble to the Brazilian real and Turkish lira. Deutsche Bank is advising investors that developed country assets will outperform emerging markets by 10 per cent this year.
The answer to all this for long-term, patient investors is to ignore it. First, the notion of emerging markets is an artificial construct, designed by investment bankers and asset managers to flog more product. Very little connects China to Brazil or Russia to Botswana. To treat them as a single investment category is nuts. Second, a country’s economic growth rate seems to have very little bearing on investment performance, as London Business School research has shown, perhaps because strong growth attracts too much capital, which ineluctably erodes future returns. China’s widely expected economic slowdown may be no bad thing at all for shareholders.
Sheer weight of fad-following institutional money may well dent emerging market values for a while, but that will create opportunities for the thoughtful investor.
Amid the hullabaloo over the on-off merger talks between Britvic and AG Barr, it has been easy to forget that there is another decent-sized soft drinks group on the stock market. A successful one, at that.
Nichols, which makes Vimto, Sunkist and Panda, reported better-than-expected revenues for the second half of the year, prompting analysts to tweak their profit forecasts slightly higher for last year and this.
In a pre-close update, it announced a 4 per cent increase in second-half sales, lifting total revenues for the year to about £109.9 million, up 2 per cent on the year before. The second-half increase, helped by the hot weather during July and August, was a welcome boost after the fall in the first half.
Its core UK division did even better, with second-half sales growing by 5 per cent. That was a turnaround from the 3.9 per cent drop in the first half and meant that full-year sales were up 2 per cent.
There was a mixed picture at Vimto. The dilute version lifted sales by 11 per cent, but reduced discounting in the fiercely competitive carbonated market meant that sales of the fizzy version were down 6 per cent. Again, things perked up in the second half.
Nichols took its foot off the promotional pedal to focus on profit over volume and that seems to have been a success, with revenue per case and margins “showing good improvement” during the year.
Having rebased UK margins last year, the challenge now is to get revenues moving faster.
The shares, down 9p to £11.71, are up about 36 per cent in the past 12 months, valuing the company at a chunky 25 times 2013 earnings. That will come down this year and with net cash of about £34 million, or 92p a share, on the balance sheet, such a premium is not unwarranted. Buy on weakness.
Gilts
Britain’s cost of borrowing fell as gilt futures rose after the latest assessment of the American jobs market proved much weaker than expected, rekindling concerns about the resilience of the economic recovery there. Investors sought havens and ten-year gilt yields fell by nine basis points to 2.89 per cent.
Bet of the day
Spread-betters looked at Royal Mail shares that have risen by more than 75 per cent since the controversial flotation of the postal service in October and sold. Too far, too soon, punters declared, eyeing its tougher competition and the need for huge investment. Capital Spreads quoted 570¾p to 573¼p on Royal Mail.
Deal of the day
Kea Petroleum accessed more than £6 million through an agreement with Darwin Strategic, the corporate finance house. The New Zealand oil explorer agreed to issue up to £1.2 million of convertible loan notes alongside an equity finance facility of £5 million. Shares were marked 9.4 per cent lower to 1.93p.
