US Edition JLT
424¼p -15¾p
Questor says Buy
The number of companies that saw their share price rise last year were few and far between, although insurance broker Jardine Lloyd Thompson was one of the star performers.
In 2008, JLT outperformed the FTSE 250, rising a very respectable 31.7pc. Part of this was due to hopes it would benefit from an increase in insurance premiums as underwriters seek to recoup losses from worse-than-expected hurricane claims. Insurers are also having to rebuild their balance sheets due to poor investment returns and JLT should pick up higher commissions.
JLT was additionally boosted by rival Benfield Group being taken over by industry leader Aon. There have been hopes that JLT could also become a bid candidate, but to date, no predator has emerged.
It is entirely understandable that in the absence of bid activity, the shares have eased back in recent months due to profit taking. This month's upbeat set of results should turn the focus back on the insurance broker.
Chief executive Dominic Burke said they showed an "excellent operational performance", adding that despite the difficult economic outlook, he expects the group to make "further progress" in 2009.
Pre-tax profits were down marginally, off 3pc at £92.8m, although operating cost ratio, which measures costs as a percentage of revenue, is improving slightly. It fell from 86.9pc in 2007 to 85.8pc in 2008.
The group should be well positioned in 2009, offering a range of different products. About 44pc of its revenue comes from selling "retail" products like car and home insurance to the man on the street. A further 44pc comes from "the London Market" which encompasses specialist risks at the world's largest insurance market Lloyd's of London. The rest is derived from offering advice on pensions products.
It is also diverse geographically, operating in a number of regions such as Australasia, Asia and Europe. In the insurance industry, a lot of premiums are priced in dollars and JLT's results are highly sensitive to changes in the sterling versus dollar exchange rate as it pays most of its staff in pounds.
Even after hedging, a one cent movement translates into a pre-tax change of approximately £750,000. Currently some 85pc of anticipated dollar earnings are hedged at an average rate of $1.72. This drops down to 65pc at an average rate of $1.57 for next year.
JLT has not always been in such a strong position, and just three years ago had a major boardroom shake-up after sounding a string of profit warnings. It has since had a restructuring, growing its London Market and retail divisions and sold off its US business.
It has taken great steps to change and is now acquisitive, buying nine companies last year for a total of £29m. These bolt-on acquisitions are likely to help spur on the group going forward and more acquisitions are set for 2010.
As well as spending money on snapping up smaller businesses, JLT has been in a position to make payments to investors.
Shareholders on the register on Friday will be entitled to the final dividend of 12p. The total dividend for the year is unchanged at 20.5p, putting the shares on a current yield of 4.8pc. It is 1.5 times covered, a slight improvement on the 1.3 times cover for 2007.
As JLT is the only listed UK insurance broker and does not engage heavily in US business, it is difficult to find a direct competitor to value the shares. It is the fourth largest broker in the world, and compared to its closest quoted – albeit US – peer group, the shares are trading at a slight discount of 12.5 times.
There are two key risks to the business – a fall in premiums and a materially weakening of the dollar. Since neither of these factors show any signs of happening, investors should view any dips in the shares as a buying opportunity.
Mitie Group
180¾p +5½p
Questor says Hold
Mitie Group was insistent that there is plenty to power on the engineering and building maintenance company as more businesses are outsourcing to reduce costs.
So far this year, shares in Mitie have been weak, reflecting fears about a slowdown in the UK economy and companies curbing their spending. Monday's pre-close trading update, however, revealed that business is on track.
Yes, there has been some weakness in areas such as fitting out London offices and installing plumbing and heating systems in new build houses. But Ruby McGregor-Smith, chief executive, says there are signs of this business picking up and anyway, they currently equate to less than 5pc of revenue.
Ms McGregor-Smith said outside this sector, the pipeline is "positive". To demonstrate this, Mitie unveiled a string of contract wins for the first time, including a deal to clean an extra 340 Barclays branches and a £50m repair and maintenance contracts with Sentinel Housing Association.
The company is well positioned as its revenue is divided almost equally between the public and private sectors. Furthermore, it has no single customer accounting for more than 5pc of revenue.
Friday's statement was reassuring, and while the shares do not look particularly expensive trading on 11 times forecast earnings, Mitie has outperformed its sector. Investors should wait for more details at the full year results on May 18 before taking any action. Hold.