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Tempus: rising tide is sure to lift credit checker

 
 

Experian reckons to have spotted the upturn in UK consumer spending as long ago as the end of 2012, and a similar improvement in the United States slightly before that. This would not be surprising: the company provides credit checks to financial institutions, and, plainly, the more people seek loans to buy cars or whatever, the more goes through its books.

The latest financial year to the end of March, though, was a sluggish one. Organic revenue growth, the measure the company prefers, returned only in the fourth quarter, to 3 per cent after a flat outturn in the three previous quarters.

For the year as a whole, North America, the largest business, saw a fall of 2 per cent. Latin America, which has been the engine for growth since the purchase of a majority stake in Serasa in 2007, produced a rise of 3 per cent.

There were a number of drags on Experian’s performance. Its US consumer services operation has been underperforming. Customers are being moved on to the company’s own platform, a process that is largely complete, but which has brought with it inevitable disruption. Regulatory change, too, is dissuading credit card providers from opting for the bolt-on services that Experian offers.

The other main drag was the Brazilian economy, though the company is focusing on high-growth areas such as providing the less well off with credit, through a website that allows them to access loans and repay them.

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In January the company raised its debt ceiling to finance bigger returns to investors. It is highly cash generative and is prepared to accept higher gearing while pushing out excess capital to shareholders. A $600 million share buyback programme was initiated then.

Small incremental rises in revenues tend to have a disproportionate effect on Experian’s bottom line and it can only benefit from the improving US and UK economies and some stabilisation in Brazil. Because it reports in dollars, the stronger US currency is to the benefit of investors who get their dividends in pounds, although currency movements could still count against it.

The shares, up 37p at £12.14, sell on nearly 20 times earnings. Not cheap, but worth it for the long term.

Rise in actual revenue +1% to $4.8bn

MY ADVICE Buy long term
WHY Though the shares are by no means cheap, Experian wll benefit from GDP growth in the UK and US and its US restructuring

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Grafton Group

Rise in four-month revenues 6.7%

The builder’s merchants have done remarkably well out of the housebuilding boom and the recovery in the UK construction sector, so it comes as some surprise to learn that conditions within the sector are becoming more competitive.

There are signs, though, that with the industry generally returning to a more normal level of growth, some merchants are cutting prices to stimulate sales. Grafton Group told its annual meeting in Dublin that, although market conditions were positive and like-for-like sales in the UK were ahead by 4 per cent in the four months to the end of April, there were signs of competitive pressures, and perhaps some pre-election caution.

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Group revenues were up by 6.7 per cent to £698 million in what is traditionally a quiet period, benefiting from the continuing strong recovery at its Irish operation. The small Belgian business is proving more difficult than had been expected, though.

Grafton shares, which have risen from 600p a year ago, lost 22p to 821p. Some profit-taking was inevitable in yesterday’s market. They still sell on 20 times earnings, which looks well up with events.

MY ADVICE Avoid for now
WHY The earnings multiple does not suggest much upside

Hiscox

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Rise in gross written premiums 12%

In the first quarter of this year pretty well everything was rosy for Hiscox. The weather in Europe was good, as against the sodden conditions a year before. The incidence of claims was low, barring a degree of political risk because of the oil price and the situation in Ukraine, for which the company has reserved $17 million and the $15 million cost of a gas rig explosion in the Gulf of Mexico in April.

The introduction of QE in Europe improved the investment performance, a return of 0.8 per cent — double that of a year before. Even currency rates were moving in the right direction for a change.

Total written premiums rose 12 per cent to £561.7 million. This reflected strong growth at its retail operations in the UK, Europe and the US. The company avoids writing large contracts in areas where rates are still falling, such as covering US catastrophes and Japanese earthquakes, concentrating on specialist areas such as professional indemnity, particularly in the US.

The shares have shot ahead from 684p since I tipped them in November, though they lost 11½p to 806½p yesterday. Blame the market, some understandable profit-taking or even dimming hopes that Hiscox could attract a bid.

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They are still on 1.8 times net asset value, which is high for the sector. Hiscox has been and will continue to be a quality play and worth holding for the long term, but the nature of insurance suggests that there will be some bad news along in due course. Probably not worth buying at this level, then, though any weakness would provide an opportunity.

MY ADVICE Avoid for now
WHY Shares are beginning to look expensive

And finally . . .

This column has tipped 3i Infrastructure in the past as a reliable source of income, but the latest results have exceeded expectations. The sale in January of its holding in Eversholt Rail has prompted a 17p special dividend, to add to the 7p total for the year, itself in excess of expectations. The kind of infrastructure projects that 3i wants are becoming more scarce, and the fund is cutting back slightly on its performance targets. It is also forecasting a 7.25p dividend for the current year, putting the shares on a forward yield of 4.4 per cent.

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