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This year’s hurricane season is turning out to be a pretty pricey one. According to risk modellers RMS, the season has already caused nearly $70bn worth of damage, and it isn’t over yet. This is going to turn out to be “the largest insured loss in history”, says Robert Miller in the Fleet Street Letter.
On the face of it, that’s bad new for insurers and reinsurers - they are having to pay out massive sums - but over the longer term it could actually turn out to be very good news indeed, as it will lead to “massive rate increases in classes of business affected by the hurricane”. Kiln (KIN), an insurance and reinsurance specialist, is well positioned to benefit from this, says Miller. It is one of the smaller Lloyd’s insurers, but has a “great reputation among Lloyd’s Names and their advisers”.
More importantly, however, Kiln’s business is focused on just the areas that are most likely to see rising premiums in the coming months (energy, exploration and production risks, energy consequential loss, cargo, trade disruption and consequential loss, and so on). There is no certainty that 2006 will not be another devastating hurricane season. However, if hurricane losses revert to the norm after two very damaging years, “Kiln will profit handsomely”. And even if next year’s hurricanes do hit land and cause the massive destruction seen this year, Kiln will be protected by the much-increased premiums and deductibles that it will be able to apply.
Kiln has net assets of 80.2p per share, with a yield of 3.5% (the company has promised to keep the dividend above 3p over the insurance sector’s cycle, something it should not find hard to achieve). On a forward p/e of just over six times, the shares do not seem expensive and Miller thinks that an upside of 50% from today’s price should be “obtainable” within six months.
Revamped Babcock is undervalued
Not long ago, Babcock International (BAB) was an engineering conglomerate. But the group has been revamped over the past few years, moving steadily into support services. It operates several shipyards for the Ministry of Defence, which is seeking to lower costs by outsourcing various activities. It also maintains aircraft and equipment in the UK, as well as in Afghanistan and Iraq. The group has broadened its customer base by taking over Peterhouse Group, a provider of infrastructure services for the rail, power and telecommunications sectors. The revamp has bolstered the medium-term outlook: the group recently reported that it had won a series of contracts, including a five-year extension to its management deal for a naval base on the Clyde, for example.
Beyond the defence sector, Babcock boasts an impressive £2bn worth of orders, says Tim Steer of New Star Asset Management in The Sunday Times. There should be more to come as Babcock and Balfour Beatty should share much of the upgrade of the national grid, while Network Rail continues to push ahead with track replacement and signalling refurbishment. Babcock is also bidding for a number of school contracts. The group’s transformation heralds opportunity for investors: support services groups trade on around 16 or 17 times 2005 earnings, but Babcock is on 13 times earnings for the year to the end of March. A gradual rerating should therefore be on the cards.
Expanding Erinaceous generates serious income
Erinaceous Group (ERG) has come a long way since its inception in 1999. The property management and building consultancy company, which aims to provide its private and public-sector clients with a “one-stop shop” for the operation and development of properties, notched up turnover of £4.3m in the year to March 2000. Four years later and this figure had risen nearly tenfold, while operating profits had reached £6m. And the group’s growth is far from over. Last week, Westminster Council gave it another 600 homes to manage, bringing the total to 7,600. Erinaceous has also been named preferred bidder for the operation of Shoreham Airport and is set to oversee works at Gatwick Airport over the next two years. Ensuring that the lifts are working in Westminster and contributing to the smooth running of the development at Shoreham will guarantee serious income for at least five years, with turnover from the two contracts pegged at around £5m-£7m, says Questor in The Daily Telegraph.
It’s also encouraging to note that a recent acquisition, Hercules Property Services, has proved successful: “rapid growth is all too often spoiled by careless purchasing”. With the group “well on the way” to becoming the one-stop shop it aspires to be, and the Government’s Decent Homes initiative (aimed at improving the management of council housing) due to deliver more growth, the shares - bolstered by the group’s move from Aim to the main market - are worth buying on a forward p/e of 14. Analysts at Numis are also keen, deeming the shares a “buy” and upgrading their price target from 346p to 360p - implying upside of 20% from current levels.
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Annunziata Rees-Mogg
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