Midas share tips: Admiral Group and H&T
Insurance is a funny business. More often than not, companies lose money from insuring customers against potential accidents. They charge too little and after paying for claims, salaries and back-office systems, they will frequently declare insurance losses.
They try to make up for this by investing the money customers pay for insurance in the financial markets. Sometimes the strategy works. Sometimes it fails miserably. But Admiral Group is different. It makes money from insurance and it barely invests in financial markets.
The company was formed in 1993 and by December 2007 it had joined the FTSE 100 index of leading companies, had more than one and a half million customers and was delivering profits of more than £180m.
Admiral operates several brands, including elephant.co.uk and confused.com, with the latter allowing consumers to compare insurance quotes from a range of companies.
The group focuses on direct motor insurance, sold either via the phone or the internet and this means that its costs are lower than those of many competitors. It is also better than most at pricing insurance properly and its record is such that it manages to pass on most of the risk to the reinsurance market.
This means it is less susceptible to big losses than other insurers and because its business is less risky, it does not have to hoard loads of cash, which its rivals do. Instead, it pays out most of its earnings in dividends.
In 2007, for example, the company paid a dividend of 44.6p and earnings per share (pre-tax profits divided by the number of shares in issue) were 48.6p. The results for 2008 will be published in early March and brokers forecast a dividend of about 50p against earnings per share of 54p.
Overall profits for 2008 are expected to be about £201m, an 11 per cent increase on 2007. And profits for 2009 are forecast at about £220m, with earnings per share of about 60p.
Admiral is not immune to the recession. If there are fewer motorists on the road, then fewer people need to buy car insurance. On the other hand, premiums have been rising significantly and this should help to offset any reduction in the volume of business. Admiral also makes substantial profits from selling services such as breakdown cover.
Chief executive Henry Engelhardt has been there from the beginning and is a firm believer that happy employees deliver a better service, which means satisfied customers, more sales and higher profits. The strategy has worked so far and should stand Admiral in good stead.
Admiral is also expanding into Europe, where there is huge potential for lowcost insurance products.
•• Midas verdict: Admiral is well regarded in the stock market and its shares, at 891½p, have proved more resilient than most. They provide a good source of income and the price should rise. Buy.
MIDAS UPDATE: Bright outlook at pawnbroker H&T
H&T stands out on the High Street. Unlike virtually every other retailer, the group recently said its 2008 profits would be higher than brokers' forecasts as performance in the second half of the year had been better than expected. Underlying sales in December were up three per cent and expansion plans were progressing well.
But H&T is not your average retailer. It is a pawnbroker.
Most people think pawnbrokers are like oldfashioned money-lenders, making pots of cash from other people's misery. In fact, 80% of pawned items are redeemed, mostly within three months.
The business model is quite simple. Customers mostly hand over jewellery and are given cash in return. They are charged a hefty 8% interest per month and are expected to repay the loan plus interest within a given time. If they do not, items with an estimated value of more than £75 are sold by auctioneers and any surplus cash is returned to the customer. Items valued at less than £75 are sold by the pawnbroker either as secondhand jewellery or as scrap to specialist bullion houses.
The company might do well from the recession. It also benefits from having tripled the number of stores over the past decade to 105 and from the high price of gold.
Chief executive John Nichols, who has been in the business for 12 years, has focused heavily on improving customer service and making stores light and bright.
Brokers expect profits of about £11m for 2008 and nearly £11.6m in 2009. A dividend of more than 6p is forecast for the year just ended, rising to 7.5p in the current year.
• Midas verdict: Midas recommended H&T in September, when the shares were 179p. They are now 194p - a pretty exceptional performance for an Aim stock. At this price there is still plenty of potential, so existing investors should hold and new ones are advised to consider buying.
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