Investment Column: Look past RSA's hunger for the next deal

Tate & Lyle; Millenium & Copthorne

Our view: Hold for now

Share price: 133.8p (+0.7p)

RSA, the insurer, produced a reasonably upbeat trading statement yesterday, with net written premiums up 10 per cent from last year to £5.5bn. What might be more of a worry is the company's stated intention to do deals.

RSA was in a poor state when Andy Haste took over and the job he has done in turning around what looked very much like a sinking ship should not be underestimated.

The company has been actively gobbling up small fry for some time (no less than 10 acquisitions made in 2010 already, which is quite an aggressive run rate to say the least).

However, it quite clearly has bigger ambitions, as can be seen from the abortive (and rather unrealistic) attempt to prise Aviva's general insurance business from it. The problem with such big-ticket acquisitions is that their record of delivering value for shareholders is hit or miss at best.

In general, business is mixed for RSA. Adverse weather in Canada and Scandinavia is not helpful, but the loss estimate from the Chilean earthquake is unchanged and the company should still hit a combined ratio of 95 per cent – in other words, it will make £5 profit on every £100 of premium taken in after costs and claims. That's before any return from investment on those premiums is taken into account. Very reasonable, and better than Aviva.

On valuation, however, RSA is not cheap. The shares trade on about 1.3 times net asset value, which is pricey compared to, say, some of the Lloyd's of London insurers. But RSA carries far less business risk, and when one looks at the earnings multiple (less than 10) and the prospective yield (a very impressive 6.7 per cent) there are points in the shares' favour. The problem is the issue of deals and whether we can trust the ambitious Mr Haste to be disciplined. It's a very tough call, but having bought at 126p last year, we're inclined to continue to hold for now.

Tate & Lyle

Our view: Keep buying

Share price: 524.5p (+34.3p)

The last time we looked at Tate & Lyle, the stock was trading at under 400p and valuation multiples stood at just over 11 times forward earnings. Since then, the sugar producer's shares have climbed well above 500p and the valuation has firmed up to about 11.8 times forecasts for 2011. So, has the rally run its course?

For starters, yesterday's half-yearly results told of a strong business. Tate defied forecasts with a 21 per cent rise in adjusted pre-tax profits and said it was confident of making progress over the full year period. Beyond that, the industry backdrop has improved. As RBS points out, the combination of Mexican demand and an improving outlook for industrial starches means that the balance between supply and demand is tight. This bodes well for sweetener margins in the US once Tate is done with annual contract negotiations.

Investors should also take note of self-help moves as the company undertakes initiatives to, as it puts it, "focus, fix and grow" its business. Though we're no fans of management jargon, the steps do support the investment case. And while the fruits of these initiatives may not be apparent in the short term, they will, we think, serve to underpin Tate in the medium to long term. All this, plus a healthy forecast yield of about 4.7 per cent for 2011, means that we'd keep buying.

Millenium & Copthorne

Our view: Hold

Share price: 565p (+17.5p)

Hoteliers, particularly in Europe and the US, were ravaged by the recession, as companies slashed travel budgets. But since it ended, the performance of companies, such as Millennium & Copthorne (M&C), has improved. M&C provided further evidence of this yesterday with strong figures on profitability and revenue per available room (revpar). The company, which operates Millennium Hotels, Copthorne Hotels and Kingsgate Hotels and Resorts, said this grew across every geographical region for the three months to 30 September. Occupancy rates grew 2.5 per cent with room rates rising by 9.1 per cent.

The star performer was Singapore (revpar up 29 per cent), M&C also delivered double-digit growth in London, the rest of Europe and regional US. Even better, these uplifts are feeding through to the bottom line: pre-tax profits grew 22 per cent to £41.7m in the third quarter. However, the shares have surged over the past year and now trade on a lofty multiple of 15 times 2011 forecast earnings. But that's behind the long-term average and the shares are only just above the adjusted book value of its assets (562p a share). So it's worth holding for now.