RSA
It is a moot point whether it is job done at RSA. Stephen Hester, the chief executive who arrived in 2014 to achieve the turnaround, says it is not, because there is now the task of moving RSA into “best in class” and seeing it outperform its peers.
This is the job of any regular chief executive, one would have thought, and does not need someone like Mr Hester. He gives no sign of going anywhere, though, and has plenty to be proud of, not least the RSA share price. This added another 28p to 605p yesterday on figures that showed the insurer is performing as well as any of its peers and has made sharp improvements in all metrics, albeit from a low base.
He can point to a price, then, that last autumn went over the 550p at which Zurich Insurance was considering a bid before it pulled out in autumn 2015. Meanwhile the necessary restructuring has proceeded apace. RSA is out of Latin America and Russia and this month sold the legacy closed funds, the last disposal needed. Cost cutting is running ahead of target.
The insurer ended the year with a Solvency II coverage ratio, the measure of excess funds over those that could potentially be needed, of 158 per cent, or about £1.1 billion of surplus cash, at the top end of its target range. The sale of that legacy business will bring in another
£300-£350 million to be used to pay off expensive debt and further improve the balance sheet. On an operational level, group underwriting profits of £380 million, up 73 per cent, exceeded investment income for the first time, although this was partly because the latter was hit by low bond yields.
The remaining businesses did well enough in terms of core operating ratio, the main measure of profitability, though Canada was held back by payouts on fires in Alberta; and Ireland, the subject of an accounting fraud, remains in negative territory after another £50 million of write-offs.
So operating profits were ahead by 25 per cent to £655 million. The only drawback for investors is that on some measures the shares are looking a little pricey. They are trading at more than twice 2016 net tangible asset value and sell on about 14 times this year’s earnings. Though the long-term future is brighter, some might consider taking profits.
MY ADVICE Hold
WHY RSA is well positioned with the hard work mainly done, but given the price performance investors should lock in some profits
Mondi
The main driver for Mondi, the FTSE 100 packaging specialist, is the extent to which it can force through price rises for the various specialist papers that it supplies. As the company, which is quoted in London and Johannesburg, reports its 2016 results, the outlook for next year looks pretty good.
Mondi has achieved price rises almost across the board, coming into effect this spring. These will be offset by increases in the cost of energy, a big contributor, and in the price of raw materials, but one analyst was confident enough to predict that this would mean €60 million to €70 million on earnings this year.
In 2016 Mondi achieved a 3 per cent rise in operating profits to €981 million on revenues that were down 2 per cent in reported terms, given the headwind from currency movements. That may not seem much of a gain, but the company is a compounder that grinds out small gains year on year, added to by acquisitions.
The €185 million spent on these last year and a 10 per cent rise in dividends mean any cash return hoped for by some is a way off. Still the shares, up 51p at £18.88, sell on 15 times earnings and look good value.
MY ADVICE Buy
WHY Mondi is well placed for the current year
National Express
National Express presents itself as a very different investment proposition to the three other transport companies with which it is normally bracketed — FirstGroup, Stagecoach and Go-Ahead Group — one with no exposure to the British rail system.
This column has long argued that UK rail, with its frequent surprises and the uncertainty of the franchise system, makes such companies unattractive as investments. National Express has taken the same view, selling its remaining small routes, c2c east of London, last month.
This reduction of risk has allowed the company to be more generous with the dividend, what might be seen as the c2c premium lifting the final dividend by 10 per cent and the total by 8 per cent to 12.28p. It has also allowed National Express to raise cashflow expectations by £20 million to £120 million. This is significant because while the dividend will absorb a bit more than half of this, the rest can be used to continue the string of investments in the US, Spain and elsewhere, with the company saying that it has more opportunities than it can fund.
Last year’s US deals brought in a 15 to 20 per cent return and subsequent ones will provide growth unavailable from the remaining UK activities, coach and bus. Meanwhile the fledgling German rail business will be in a small profit this year.
National Express raised pre-tax profits by almost 15 per cent to £170.1 million, leaving out c2c. The shares, up 8¼p at 350p, sell on 12 times earnings and look like the best bet among that quartet.
MY ADVICE Buy
WHYExit from UK rail gives chance of growth elsewhere
And finally...
Howden Joinery continues the difficult balancing act of keeping its head above water in challenging markets, investing in the business and returning capital to shareholders. The kitchen specialist increased prices at the end of last year that will counter softer trading and announced, along with the 2016 figures, a share buyback programme of up to £80 million. Howdens plans to open about 30 depots this year; pre-tax profits were up 8 per cent to £237 million, margins remaining stable despite adverse currency moves.
