Aviva Shares in Aviva reacted poorly to the offer for Friends Life at the start of December. I suspect that this had more to do with genuine surprise, because few analysts had seen the deal coming. In addition, a large shareholder in Aviva took the chance to sell a large chunk of its holding.
I took the view that the deal favoured Aviva rather more than it did Friends Life, and as a result the insurer was one of my picks for the year. The market seems to have come around to this way of thinking: the shares opened the year at 484½p and added 37½p to 569½p yesterday on 2014 figures that showed nearly all the metrics heading in the right direction.
The most obvious standout is the £692 million excess cashflow, up 65 per cent, well ahead of forecasts and putting Aviva in line to achieve its target of £800 million next year. Mark Wilson, the chief executive, is squeezing down hard on what had been an inefficient balance sheet, gaining savings from more efficient administration of its back book of legacy business and on the amount of cash that has traditionally gone out from the core business to the various operations.
He reckons that the balance sheet is pretty well where it should be, but there is more to be done in improving the fund management side, which experienced an 8 per cent decline in operating profits, and from cross-selling Aviva brands, such as Norwich Union, to existing customers. The company is well behind its peers in the United States in this.
There is not a lot that can be said about Friends Life until the deal finalises in mid-April except that nothing untoward has been turned up yet. Aviva was confident enough to restate the financial advantages of the deal, which brings increased scale and cash generation without a significant rise in costs.
So the deal will add £600 million to cashflow, generate £225 million of synergies and eliminate any need to cut borrowings further. As regular readers of this column will know, I am sceptical about such forecasts, which almost always turn out to be underestimates.
For investors, the news is a 30 per cent rise in total dividends to 18.1p. This offers a yield of a little more than 3 per cent but scope to increase the payment sharply when the Friends deal is done. Buy for that.
Rise in value of new business: 15%
My advice Buy Why The Friends Life deal looks like an increasingly good one; the cash is piling up, which augurs well for dividend growth
Aggreko Chris Weston has been running Aggreko for only a couple of months, so one would hardly expect any significant changes so far. The business model is robust enough, letting out temporary generating capacity where it is needed, either for one-off events or in countries short of this, even if the shares have seen a few upsets in the past as the market’s overexuberance has made contact with a less positive reality.
Mr Weston has, however, put in place a few cautious notes that might ensure that any shocks this year do not act as a further unfortunate surprise. He has warned that the pace of mobilisation of new plant, 287MW so far this year, will bring challenges as this is put in place, given that just 64MW was deployed in the same period last year.
Security in places such as Libya is a concern, given the difficult experience that APR Energy, its smaller rival, had there and the need to withdraw its plant. Finally, oil and gas account for 17 per cent of revenues. Most of this is at production facilities and unlikely to be hit by further capital spending cuts, but a potential headwind is still there for the rest of the year.
To these one might add the deployment of that excess APR capacity, which could put downward pressure on Aggreko’s margins, and a continuing fallout from the Australian mining industry.
Underlying trading profits were off by 2 per cent at £306 million in 2014. The shares, off 11p at £16.25, change hands at 19 times earnings, which suggests that they are fully valued, with little to go for short term.
Revenue $1.58bn Dividend 27.12p
My advice Avoid for now Why Shares highly rated, with challenges looming this year
London Stock Exchange Analysts, never being satisfied, are already wondering what the LSE will do with the $1.4 billion or more that will be freed up by the impending sale of the fund management side of Frank Russell, which was bought along with its indices division late last year.
The LSE has transformed itself over the past five years under the leadership of Xavier Rolet, the chief executive. Capital markets, the nuts and bolts of shares trading in London and Milan, is now less than a quarter of revenues; 45 per cent of these, post Russell, come from the United States.
The initiatives announced by the LSE yesterday are hardly capital-intensive. They are a new portfolio-margining service at the majority-owned LCH.Clearnet and an agreement with the Chicago Board Options Exchange to develop a new range of index options, one of the rationales behind the Russell deal.
The LSE is keeping its options — no pun intended — open over what to do with the Russell cash, with an acceleration of dividend payments one of them. The shares are horribly hard to read: up 3p at £24.03, they sell on a hefty 21 times 2015 earnings, but I would buy for the (very) long term.
Revenue $1.28bn Dividend 22.5p
My advice Buy long term Why Shares are expensive, but growth is still there
And finally ...
Inmarsat has been a difficult investment, as I have suggested in the past, prone to unforeseen reverses. The satellite operator is sounding a little more confident. There are positive signs in the long-running saga over LightSquared in the US, with payments continuing to be made and hopes that some sort of deal may emerge from the bankruptcy. The company is talking about continuing underlying growth at the core business, and there is even a decent rise in the dividend, from what has never been seen as an income stock.
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