This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
VALUE INVESTING
|
|
By
First of all, a confession. I own shares in Royal & Sun Alliance (LSE: RSA), having first bought about eight months ago and then again a couple of months later as the price fell. My average buying price is around 355p. This is not a share into which I have sunk everything in my normal style, but merely a side bet which I felt was worth a couple of quid. Results for the first six months of the current financial year have just been announced. I like financial companies, from insurance companies to banks to the more outlandish types such as money broker Garban-Intercapital (LSE: GBN), about which I wrote a few weeks ago in this series looking at value shares, but not pyad value shares. In contrast to many other investors, who often find these kinds of shares impenetrable because they try and conduct deep analysis on the figures which can be extremely complex, they appeal to me because they can be volatile at times, reacting swiftly to changes in the economy such as interest rates, housing and so on depending on with what exactly they are involved. As people who know my style will appreciate, I have little interest in doing deep analysis on shares. For one thing I find it cataleptically boring, and for another I find it counterproductive, for it smacks of that fatal attraction of investing – love. I do not want to know what the "reverse cash flow alternating depreciation ratio" is for any share in which I am interested. I could do this, because regrettably for historical and professional reasons I understand all that wossname and it took an effort of will some years ago to prevent myself doing just that. But as I've written before, it struck me that people who go to such lengths of analysis do so because they actually like the share for emotional reasons and are just seeking numerical confirmation by looking where they might find some justification. They care, whereas I don't. As soon as I've bought I can't wait to get out. Back to RSA. Here's the usual fundamental stuff, mostly from the 31/12/99 year end. Why look at "tangible" book value rather than book value? Well, this is lower for companies that have intangible assets, as Royal & Sun has, and hence more conservative. That is the reason that people might prefer it when considering the net asset value of a company, the idea being that intangibles like goodwill cannot be as easily valued as physical assets, which have a much clearer value. Royal is a FTSE 100 company, one of three composite insurers in the index and the smallest, the others being the giant CGNU (LSE: CGNU) and the lesser giant Allied Zurich (LSE: ADZ). Both of these are currently far bigger than Royal, by roughly three times and twice respectively in terms of market capitalisation. My colleague TMF Essex (Rob) commented in his Fool's Eye View column yesterday on this company, because the results were came out yesterday. I recall that he never liked it much even when the share price was in the low three-hundreds. From the tone of his article I suspect that his opinion has not improved. From my point of view I am at present showing a around 25% profit on paper, including the 16.3p final dividend paid a few weeks back, the yield being quite high. In fact my yield at 355p is 7%, very high for a FTSE 100 company, and of course it was a prime reason for my going in at first and then again. Price to book was, at 1.2, another critical feature of my interest in RSA. That is at 31/12/99 book value, but in today's announcement for the half year to 30/06/00 the company quotes 460p per share as book value, giving a ratio of 0.9. As Rob observes, the shares are trading only marginally below tangible book, and he thus concludes that there is not a lot of value left. But compare this with the ratio on CGNU at 1.4 and Allied Zurich on a relatively massive 2.8. I see little reason why RSA should be so much cheaper, although of course it could be argued that RSA is about right and the others are too dear! If RSA was to rise to the present price to book value ratio of CGNU, this implies a gain of 50% or so on today's price of 430p. As is common knowledge amongst big insurers, they lose money on underwriting and hope to make a profit on the investment side. RSA is no exception and its stated aim is to bring down the rate of insurance losses. Note: not to make a profit but to lower the losses. But that is already getting too analytical for me. What I see is a large company trading a little below book, despite having rapid growth, particularly in its range of investment and life products. I do not see why it should be cheaper on yield and book grounds than the two competitors I mention above and although, as I warn, the explanation may be that they are too dear, I find it more likely that RSA is still too cheap, though obviously not as cheap as it was at 355p. The sort of companies that habitually trade below book are property companies and investment trusts that have no other business. For a large insurance company to trade below book means that it is being treated a bit like an investment trust, which in turn means, in a way, that the insurance business is being thrown in for nothing. Some may argue that the insurance business is indeed worth next to nothing, but I don't buy that. RSA has a substantial market share of a range of general, life and investment products. This has value. The company may not be exploiting this to the full at present but it is there, and it remains undervalued in my view. But I can be wrong. For the moment, though, I remain in.
Where Next?