MARKET COMMENT
Right Royal Value

By Maynard Paton (TMFMayn)
August 12, 2004

Royal & Sun Alliance (LSE: RSA) could be the cheapest share in the FTSE 100. Only could be mind, because as the insurer stated this morning deep within its interim results, "the uncertainty inherent in insurance is inevitably reflected in the financial statements of insurance companies."

The uncertainty is demonstrated by the accounting equivalent of War & Peace. RSA's results today regaled shareholders with lengthy reports of regulated capital developments, risk-based capital positions, estimation techniques, uncertainties, contingencies, asbestos claims and lawsuits -- all of which were interspersed with the usual insurance beancounter gobbledegook.

However, three simple value anchors -- at a 72p share price -- can rescue ordinary investors from RSA's financial minefield. First up, the interim dividend was lifted from 1.62p to 1.65p per share, which suggests things are not going too badly within RSA's books. If the final 2.9p payout is maintained, the yield will be a decent 6.3%.

Next comes RSA's net tangible book, which was reported at 94.2p per share and therefore gives a low price to book ratio of 0.76. Even after subtracting the £525m year-end pension deficit excluded from balance sheet, the P/B still comes to 0.96.

Earnings though are a little more difficult. RSA hasn't recorded a profit since 1999 and today's half-year results revealed a further (£83m) deficit. Broker forecasts vary wildly, but the consensus is around 10p per share for this year and next. The price to earnings ratio then is around seven.

Of course, despite the shares having looked good value on the same measures, the financial small print has haunted many RSA investors over the years. However, new management, their disposal programme and comments today about 'good results' from ongoing businesses give some hope that this time will be different. RSA in summary? Plenty of uncertainty, but nonetheless worth a value sidebet.