Green Build Expo

Plenty to savour in the credit column

DATE: May, 5   COMMENTS: 0   AUTHOR: Allan Azarola

Credit scores might not always make the most pleasant reading, but there was little to complain about in the latest numbers from Experian, the industry leader.

The credit-scoring company reported solid first-half figures that showed good growth across the Americas, particularly in the United States and Brazil, while the UK and Ireland remained positive. The only blemish came from its scattering of operations across the rest of Europe and Asia Pacific.

In Britain, the relatively slow rate of growth is mostly attributable to a rejigging of the business that is following the template laid out in North America, which shifted the focus away from fewer clients paying subscriptions to a model based on free credit reports and a bigger effort to target product sales at the greater number of customers. As the US has shown, this can be a money-spinner if you get it right. At the same time, a strategic review will result in Experian offloading its email and cross-channel marketing business, which could attract considerable interest from trade and private equity buyers, meaning that the company could be on the receiving end of a cheque for more than $900 million.

Which brings us to yesterday’s fall in the share price. Experian shares have had a decent run of late, particularly given that the company has benefited from the post-Brexit plunge in the pound against the US dollar. However, with few beats, City investors appear to believe the business is fairly valued.

The dividend yield may not be stellar at just over 2 per cent. However, with relatively low gearing and continued strong cash generation, it looks sustainable and there is little downside in Experian.

On top, with a business restructuring under way and the prospect of a big spin-out in the works, there is every reason to believe that Experian could be a strong performer over the next few years, offering an attractive mixture of yield and capital appreciation. The stock looks like a good “buy” for longer-term income investors.

While the recent strong run in the share price means that the upside may be limited for now (the stock has slipped back in recent weeks), Experian’s clear growth plans both in developed and developing markets should give hope of future gains.

MY ADVICE Buy
WHY The dividend, while not great, is good enough and reconfiguration of the business offers hope of better returns

Sophos
If the market needed a reminder of the importance of cybersecurity, it got one at the weekend with the attack on Tesco Bank. As a provider of some of the most secure protection software on the market, the Oxford-based Sophos, with more than 100 million users in 150 countries, is ideally placed to benefit from the increased realisation of the online threat.

Revenues were up nearly 10 per cent at $257 million for the six months to the end of September year-on-year, although the company recorded another half of losses as an increase in spending on research and development made losses widen by a little over $10 million to $24.6 million.

Sophos’s subscription-based model means its cashflows have remained strong, so investment spending does not get in the way of shareholder payouts, allowing the company to offer an interim dividend of 1.3 per share, up 86 per cent.

With no expected drop-off in billings and a deferred cash balance of $511 million, the dividend looks secure while, with cyberattacks on the rise, there is no reason to suppose Sophos’s growth should slow. This looks like a clear buy.

MY ADVICE Buy
WHY Cyber threats underpin growth and the dividend is safe

Esure
Esure does not given an indication at the third-quarter stage of how much the insurer, owner of Sheilas’ Wheels, managed to push up motor insurance rates, merely saying that they were “favourable”.

It’s a fair bet that the company’s experience was in line with Direct Line, announced on Tuesday, where rate rises of 10 per cent were running well ahead of claims inflation of 5 per cent to 6 per cent, which is as positive as it has been for car insurers for a while. While about half Direct Line’s business comes from motors, this accounts for the vast majority at esure. Its home insurance side is suffering from the same competitive markets as its peers and took an unexpected hit from the flooding in the UK this year, which affected areas not normally touched. This meant a bit of a dent on its core operating ratio (COR), the key measure of an insurer’s profitability, which probably will end the year at 98 per cent to 99 per cent, just the right side of the margin.

This can only improve thereafter if that turnaround in motors continues, while the £65 million dividend from last week’s demerger of Gocompare.com, the price comparison website, will ensure that esure’s regulatory buffer is comfortably ahead of its needs, at the top end of an estimated 30 per cent to 50 per cent surplus.

The downside is the dividend, cut in the summer to provide capital for further growth. This suggests that for income investors the yield on the shares, 4.6 per cent, is rather less stellar than is available elsewhere.

MY ADVICE Avoid
WHY Better income is around elsewhere in the sector

And finally . . .
There must have been a flutter of concern among investors in Tullow Oil after news that there had been technical problems during a stepping up of production from its TEN field off Ghana.

This had been delayed by a legal dispute over which country owns it; an interim judgment allowed production to start in August. In the event, the technical issues were minor, though it seems that Tullow has been over-optimistic over production for this year. That output will allow Tullow to start to cut its near-$5 billion of debt this quarter.

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