Cause for optimism
Hiscox (LSE: HSX) reported first half earnings per share (EPS) that rose 20% to 43.7 pence, following a 59% growth in profits from its retail speciality business. The insurer said it benefited from “an absence of catastrophes”, but it also warned that major losses could occur later in the year
Despite a softening in the insurance market, where competition is intensifying and premiums are low, Hiscox has continued to grow its premiums and maintain its underwriting profitability. Gross premiums written increased 12.0% to £1.10 billion in the first six months of 2015, with the combined ratio rising just 50 basis points to 82.5%.
Looking forward, there are few signs that the toughening competitive environment will ease. Hiscox also warned that the worst may be yet to come, as the insurance sector’s profitability is artificially high because of low catastrophe losses. Intensifying competition is causing underlying loss ratios to rise and this trend will likely continue.
But there is also cause for optimism. Its growing retail speciality business and product innovation gives Hiscox a competitive edge in its sector. Whilst these businesses need continued investment before they reach their full potential, the benefits are already helping its bottom line.
Always getting better
Ryanair (LSE: RYA) saw its first quarter profit increase 25% to €245 million, as passenger numbers rose 16% to 28 million. Its “Always Getting Better” plan to improve customer satisfaction has so far been showing positive results. But some of the initiatives, such as an improved in-flight menu and increased leg room, reduces the simplicity of its product offering, which may make it harder to keep operating costs low.
However, the trend of increasing passenger numbers will likely continue, as disposable household incomes improve in the UK and in Europe. Therefore, despite the concerns over rising costs, Ryanair remains an attractive play on an improving economy.
Modest growth
Food producer Cranswick (LSE: CWK) saw revenue in the three months leading to 30 June 2015 rise 8%, following strong growth in volumes across most product categories. With continued investment in improving its range of products, including bolt-on acquisitions and increased exports to Far Eastern markets, Cranswick should continue to deliver relatively modest growth over the medium term.
Analysts expect underlying EPS will grow by 6% this year, to 97.8 pence. For 2016, underlying EPS is forecast to grow by another 6% to 103.2 pence. Cranswick’s forward P/E is 16.5 means it is fairly priced.
Falling revenues
Today, Petra Diamonds (LSE: PDL) announced its trading update for the year ending 30 June 2015. Lower diamond prices caused revenues to fall 10% to $425 million, even though production rose 2% to 3.2 million carats. The diamond market has not been able to escape the rout in the global commodity markets and Petra expects diamond prices in 2016 to stay consistent with prices achieved in the first half of 2015.
Mining costs, on the other hand, are likely to worsen, due to ongoing inflationary pressures, particularly with higher wages. Its on-mine cash costs in its South African operations are likely to increase by around 8%, whilst costs in Tanzania are likely to grow by 4%. This should offset the impact of the anticipated 3% – 6% increase in diamond production in 2016.
Since Petra’s earnings are likely to get worse in the coming years, its shares are unattractive.
