US Edition Legal & General
74.5p -2.5p
Questor Avoid
Long before the swine flu pandemic broke out, the UK life insurance industry was showing signs of its own contagious illness.
Time-to-change-your-finance-directoritus was first diagnosed among insurers last November when Old Mutual's Jonathan Nicholls left the insurer to pursue other interests outside the sector.
After this first case, it then spread to Prudential, Legal & General and Friends Provident. The most recent company to be struck down with this bothersome complaint was Aviva. All these businesses have said goodbye to the occupant of the chief financial officer's chair – albeit under different circumstances.
L&G's new CFO Nigel Wilson spent his first day in the job on Tuesay. He now faces an interesting first few months at the embattled insurer.
When his predecessor Andrew Palmer stood down in April, the company – once the darling of the stock market – had seen its relationship with shareholders and analysts sour over a range of issues, including the decision to cut its dividend for the first time in March.
Since then, the insurer's outlook has not improved a great deal.
At its mid-year results briefing L&G halved its interim dividend to 1.11p a share despite reporting a 12pc rise in operating profits on a European Embedded Value (EEV) basis to £657m from £589m a year earlier.
The decision, which was part of a plan to conserve cash during the economic downturn, was evidence that the company still has some way to go before its balance sheet was sufficiently strengthened. On this basis, Questor feels that taking an avoid stance over L&G shares is currently the right move. Although things might be getting better for the insurer, they aren't quite good enough to warrant buying into it.
Over the past year, the company's shares have underperformed the FTSE 100, rising 7pc compared to the blue-chip index's 9pc. L&G's shares are also trading at a consenus forecast yield of 4.5pc and a price-to-earnings ratio of 7.7 for the year ending December 31 2009 – unattractive figures compared to some of its peers in the life insurance sector.
Mr Wilson, who is highly regarded from his time at United Business Media, will need to help chief executive Tim Breedon reverse the company's dividend policy before it becomes an attractive proposition once again.This is by no means impossible with the growth in the insurer's capital surplus to £1.9bn, up from £1.8bn at December 31 and £1.6bn at March 31. These figures are evidence that not everything is moving in the wrong direction.
In contrast to this, the position for current investors is more rosy. Although the stock is not paying healthy dividends, speculation linking it to Clive Cowdery's Resolution investment vehicle could boost L&G's share price as the rumours continue to grow.
L&G is a company steeped in tradition and the addition of Mr Wilson will allow it to refocus itself once again.
Despite the promise of a turnaround, Questor believes other opportunties in the insurance industry would provide better short and long-term returns. However, investors already holding shares should sit tight in hope of merger uplift.
Serco Group
455.9p -12.4
Questor says BUY
Serco , the support services group, has secured a contract to deliver the Government's Flexible New Deal, which will see the company train jobseekers across Wales, the Midlands and Manchester and help put them into employment. The performance-based contract is potentially worth up to £500m.
The deal adds to an impressive public-service portfolio for the company, which also operates London's Dockland Light Railway, maintains our nuclear weapons, protects our borders and runs the National Physical Laboratory, the UK's world-leading measurement facility .
But, while Serco may control time and run Britain, this does not necessarily mean it makes money for investors. Its shares presently trade with a yield of around 1.3pc and a price/earnings ratio of 17 – significantly weaker than opportunities available in other sectors.
Also, Serco has underperformed the FTSE 100, which it joined in December. It has risen 1.9pc compared to the index's 9pc.
However, Serco is a company on the up in a sector on the up. Last week, it delivered a 30.8pc rise in revenue to £1.95bn, boosted by the weakening of the pound and the acquisition of SI International, an American IT-focused business, and increased the dividend 25pc to 1.85p.
In addition, Chris Hyman, the chief executive, was bullish about the outlook, claiming that the outsourcing public services will accelerate as the Government struggles to cope with a rising budget deficit. All Britain's major political parties support this trend.
As a result, Serco has forecast that its revenues could hit £5bn out of a market potentially worth more than £200bn by 2012. Operating profit margin could also improve from the present 5.6pc.
The opportunities available to Serco include running more planned new prisons in the UK and Australia, army recruitment, and the NHS.
With the yield, P/E ratio and dividend all heading in the right direction, Questor therefore believes that Serco offers a solid long-term investment.
The company is one of the few likely to benefit from the economic woes facing the UK and could be a valuable defensive play. Buy