US Edition RSA Insurance
143.8p +17.8p
Questor says Hold
IT was a bright trading update from RSA Insurance, which yesterday unveiled strong full-year pre-tax profits, a hike in its final dividend and a rather bullish outlook for the future.
Things are not looking so optimistic for 1,200 of its staff who stand to lose their jobs at the blue-chip insurer. It is slashing 14pc of its 8,700 UK workforce in a bid to save £70m by the middle of next year.
The stock market, however, tends to respond positively to the prospect of lower wage bills. Chief executive Andy Haste emphasised that the job cuts were necessary to reduce the amount of money RSA is paying out in costs in relationship to how much is coming into the insurer's coffers.
It is trying to target an expenses ratio of 14pc in the UK by the end of 2012, down from the current 17pc. Staff cutbacks will result in a one-off cost of £80m in 2009, although RSA shares responded positively to the news, jumping 14pc.
Besides unveiling plans to reign in spending, there were plenty of other revelations in yesterday's preliminary results to boost RSA. Pre-tax profits rose 13pc to £759m and the group aimed to soothe concerns about its solvency saying it had £1.7bn of reserves above regulatory requirements. Even if the FTSE 100 fell to just over the 3,000 level, it said its surplus would only drop by £200m.
With the group's surplus having risen 13pc compared to last year, concerns surrounding the dividend going forward have slightly eased. Yesterday, RSA lifted its total dividend to 7.71p, which places the shares on a yield of 5.3p. The shares are trading at almost 10 times forecast earnings.
While the figures were better than expected, Questor is still cautious. The group has 90pc of its assets in bonds and cash, but has warned that low interest rates, falling property prices and "continued investment market volatility" could hit its balance sheet going forward.
The group reported a slight rise in UK premiums and has lifted the cost of cover for personal motor risks by 6pc and household by 5pc. Liability premiums for businesses are rising by 6pc, for property by 7pc and for motor risks 8pc.
However, customers traditionally tend to shop around more for their home and contents and motor insurance during recessions so premium rises cannot be too severe. Furthermore, a recession usually results in more fraudulent claims for the insurance industry.
While any premium rise in the UK is good, it is important to remember that the British market is still mature compared to others. RSA revealed net written premiums in the UK rose just 1pc to £2.7bn, while its international business, which accounts for more than half of group revenues, saw a 19pc increase to £3bn.
One reason the overseas business has helped contribute to an increase in profits is because of a weak pound. RSA has benefited from sterling losing value against the euro, and against other currencies like the Canadian dollar and the k rona.
RSA plans to continue growing its overseas exposure, and Mr Haste said the group is continuing to look for acquisitions. "There is a vibrant deal pipeline," he said.
RSA seems to be moving in the right direction, and yesterday's statement was reassuring. Despite all this good news, RSA shares are unchanged from where they were when Questor advised investors to hold on at 143.8p in November. RSA has done well to outperform the weak stock markets during this time, but it is also now trading at a large premium to the sector.
RSA does deserve to have a higher valuation as it is a general insurer, which has different characteristics to a life assurer. Now is not a good time to buy new shares, although since RSA remains a solid business, investors already sitting on the shares should hang on.
Capita
657½p -16p
Questor says Buy
WHILE there are few clear winners from the recession, outsourcing group Capita is confident it will be one of them.
The company, which runs back office systems, said in the first seven weeks of 2009 it has won £610m worth of new contracts. This compares to total revenue last year of £2.4bn.
Capita, which has a market capitalisation of £4.1bn, has debt of £596m and has additional borrowing facilities of £942m. It made 12 bolt-on purchases in 2008 and plans to make a similar number of acquisitions this year.
It has also spent its money buying back shares equating to 1.7pc of the company and can still purchase up to 10pc of its issued share capital. This will lend support to the shares.
Capita is involved in the administration of unit and investment trusts, plus recruitment and property businesses. These could be hit by the downturn, although the company says these areas represent less than 10pc of group revenues and are largely long-term contacts.
Meanwhile, Capita should have plenty of opportunity to pick up new business as customers, such as the Government and insurance companies, look to save costs.
Questor tipped Capita's shares as a buy last July, when they were trading at 670p and despite the downturn, the shares have fallen just 1pc. Yesterday's slight dip in the share price is likely to be due to profit-taking.
The shares are not exactly cheap, trading on a forward multiple of 17 times, but with the dividend 2.31 times covered, investors should buy on weakness.