Mergers could make you money in 2008
Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Simon Shaw, chairman of EEA Fund Management and manager of the EEA UK Financials Fund
We have a negative outlook for the UK economy in 2008. Since the end of 2007, things have got worse rather than better in the financials space. We continue to see difficult trading for the banking sector, along with problems in the subprime debt market. If the economy does go into recession, which is certainly a possibility, then repackaged corporate debt might also prove to be a thorn in the economy’s side.
Despite these woes, there are opportunities to be had in the financials sector. We believe that there is a strong likelihood of an increase in merger and acquisition activity in 2008 throughout the economy. We have seen signs of this already with bids for three companies in the EEA UK Financials’ portfolio – Broker Network, Atrium, and Kiln. Two additional companies – Heritage and Close Brothers – are also in potential bid situations. At the same time, we would not be surprised to see some consolidation in the credit provider and advisory business sectors.
Omega Insurance (OIH), London Capital Group (LCG) and Man Group (EMG) are three firms we hold, which we believe will thrive despite the present market conditions. In fact, London Capital Group in particular should benefit as a direct result of the volatility.
In the last 12 months, insurance companies have fared reasonably well, with low levels of claims, and Omega Insurance is one company within our portfolio that has benefited. The group underwrites a predominantly short-tail (where claims are usually settled within 12 months) property insurance and reinsurance account, with a focus on insuring small to medium-sized insurers and re-insuring smaller insurance companies. The pricing background has deteriorated for commercial insurance, but we believe Omega has a strong underwriting history and would expect it to pay high dividends in the future. Nor would we be surprised if the company took an active part in industry consolidation in the coming year. At 153p, this represents a p/e ratio of 9.4 and a yield of 7.45%.
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One company well placed to take advantage of tough stockmarket conditions this year is London Capital Group, a medium-sized financial spreads business with two areas of interest: currencies and stockmarkets. The firm has grown significantly over the years, especially following last year’s deal with online-betting exchange Betfair. The resultant growth in its customer base and the likelihood of further market volatility should be strong business drivers this year. We expect further earnings upgrades in 2008. London Capital Group has a 2007 p/e of 25 times on a 0.7% yield and a projected 2008 p/e of 21 times with a 1% yield. The company is currently trading at a share price of 340.5p.
Man Group is a leading asset manager within the alternatives space, whose core products are dependent on trends rather than on stockmarkets. That gives it an edge over traditional asset management groups in the current climate. The performance of these products has been strong and we expect the company to continue to attract significant levels of new money in 2008, despite ongoing volatility. Man Group is currently trading on a share price of 474p, which represents a p/e ratio of 13.2 and a 3.2% yield.
The stocks Simon Shaw likes
Stock, 12mth high, 12mth low, Now
Omega Insurance, 170p, 138p, 152.75p
London Capital Group, 449.75p, 167.50p, 340.50p
Man Group, 634.45p, 436.52p, 474.25p
