There is not a lot that Mike Wells, the newish chief executive of Prudential, can do wrong. The Pru has four main strengths that he inherited.
It has M&G, one of the best-performing fund managers, even if this did suffer some outflows of retail money in the second quarter, a total of £4 billion, as investors moved away from fixed-income products in reaction to the expected rise in British and American interest rates.
It is well positioned in Asia, meeting the requirements of the growing middle class there and with a joint venture in China with Citic, the Chinese conglomerate. Though the gyrations of the Chinese stock market will be a negative, the lack of provision of old age pensions will force consumers towards its savings products. So premiums in Asia were up by 31 per cent in the first half — for China itself they rose by 44 per cent, although this predates the recent stock market rout. One of the appeals of the Pru’s shares has always been the potential from Asia, despite the debacle over the failure to buy AIA in 2010.
In the Unites States, its Jackson offshoot focuses on the baby boomers as they reach retirement, lifting profits by 11 per cent in the first half despite a hit from the higher dollar. In Britain, changes to pensions announced in the budget last year inevitably give rise to short-term uncertainties. even if the insurer is competing well in the bulk annuity market, but the Pru seems as confident as any of its peers that it will sail through the tighter capital requirements brought in by Solvency II at the end of this year.
The outcome from both Britain and Asia in the first half beat expectations. Group operating profits of £1.88 billion were up by 17 per cent and well ahead of expectations of nearer to £1.7 billion.
The interim dividend is raised by 10 per cent to 12.31p. This reflects the similar increase in last year’s payment and the policy of paying out a third of that year’s total at the halfway stage. The forward yield of 2.5 per cent is a long way from the best on offer in the sector, though.
The shares, which rose 70½p to £15.77, have not been the greatest performers since the spring and look as if they have been unfairly overlooked.
PBT £1.88bn
Dividend 12.31p
MY ADVICE Buy long term
WHY Shares have been falling since the spring and look undervalued, given the strong growth available in the Pru’s four main markets
Shares in Serco are now about as low as they have been in more than a decade, even if they are at least above the £1 at which the outsourcer raised £555 million in a rescue rights issue in March. Is it now time to get back on board?
Rupert Soames, the chief executive, was not providing much encouragement yesterday, even if the halfway numbers came in a little better than expected. Revenues were almost 12 per cent lower as a consequence of the loss of contracts such as the operation of the Docklands Light Railway. Serco knows that another 10 per cent will fall away over the next year as other contracts drop off.
There seems to have been a hitch in the sale of its overseas business process outsourcing side, which is expected to raise £240 million or so if the sale goes ahead. The flow of bad news continues, with the suspension of several employees at its Yarl’s Wood immigration centre and a bizarre report of organised “fight club” at a New Zealand jail.
Cashflow went into reverse in the first half, mainly because of the overhang of unprofitable contracts. There were more write-offs on the value of businesses up for sale. The rights issue did at least cut the debt to a manageable £290 million.
Analysts’ forecasts suggest that profits will continue to decline into 2016. The shares, off 1½p at 124p, do not sell on any meaningful multiple and dividends, understandably, have been axed.
I do not think that the shares are heading any lower, but nor do I see any reason why they should head higher, in the short term at least.
Revenue £1.79bn
Dividend nil
MY ADVICE Avoid
WHY Even with shares near an all-time low, risk remains
SIG will not formally identify it, but one of its rivals, probably Travis Perkins, is competing very aggressively on price and this is raising the stakes in the British market.
Meanwhile, the Continent, comprising about half the business, is still suffering, even if there are signs that the fall in demand is slackening off. The first-half numbers are also up against strong comparators, the winter of 2014 having been rather milder than the previous year. To add to all this is the weaker euro, which will have clipped as much as £3 million off halfway profits down by 9 per cent to £39.1 million at the pre-tax level.
This is making it difficult for the company to make much headway, despite a range of self-help measures put in place, including more efficient procurement. SIG still expects to outperform the market as a whole this year, but it has hauled back forecasts, leaving analysts to downgrade their own numbers.
Still, the dividend is up 19 per cent to 1.69p and there will be some second half improvement. The shares, off 2¾p at 198½p, have come up from below 150p in November and, on almost 16 times’ earnings, do not seem to have much further to go.
Revenue £1.24bn
Dividend 1.69p
MY ADVICE Avoid for now
WHY Shares are trading on a fairly high multiple
And finally . . .
Brokers are piling into Cineworld, the cinema operator, ahead of the halfway figures tomorrow after some positive trading numbers at the start of last month. Barclays put out a positive note the other day. Citi has just started coverage with a “buy”. Of the nine analysts covering the stock, a majority have a positive recommendation. The company’s performance is always tied to the schedule of new releases, but there is plenty on the slipway, including the latest releases from the Star Wars and James Bond franchises.
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