|
Our recommendation of Kiln (KIN), one of the oldest brands in the Lloyd's of London market, was made in July 2005 with corporate activity within the insurance sector very much at the forefront of our thinking. And some 30 months alter our exit was prompted by a takeover offer by Japan's Tokio Marine & Nichido Fire Insurance Co.
At the time of our recommendation, it was a matter of ‘when’ rather than ‘if’ as far as consolidation moves of quoted Lloyd's insurers was concerned. Indeed, despite the collapse of a deal between Amlin and Chaucer shortly prior, we identified the sector as a stage for potential tie up’s due to the substantial cost efficiencies on offer.
Historically, Kiln was amongst the most profitable companies in the sector. The company boasted market leading positions in five core business areas: reinsurance, accident and health, aviation, marine/special risks, and property.
The company was a dividend payer on a relatively low price earnings ratio whose share price had recently emerged from a bearish low. Along with many other insurers, Kiln's earnings were impacted by excess industry capacity, which caused over aggressive pricing as well as an era of an unusually high number of catastrophes, including the World Trade Center attacks.
However, in our opinion premium rates in the industry were to remain solid and Kiln provided the broad exposure that Members would benefit from. In addition, we were more than impressed by the record result delivered by the insurer in the year to 31 March 2005 in which pre tax profit jumped 15 percent to over £38 million following a strong underwriting performance.
So when Tokio Marine & Nichido Fire Insurance came knocking it was almost expected but it left us with a tough decision nonetheless. Such was the extent of Kiln’s appeal, it would not have been a surprise to see numerous suitors emerge with offers but none were forthcoming. However, our decision to sell our holding at a price just shy of Tokio’s offer is something we stand by.
Indeed, having seen where Kiln's shares came from and given the high level of uncertainty and volatility prevalent at the time, we advised Members to sell the shares rather than wait for the takeover to go through. Even those with short memories will be able to recall the damaging effect a failed takeover can have on a target company’s share price.
Has our decision been vindicated? Although impossible to tell as KIN ceased to trade, the credit squeeze has resulted in a mixed bag for Lloyd’s insurers and so vindicated our decision. Some have proven resilient, whilst others have struggled. Indeed, looking at the share price performance of Chaucer over the year (dropping over 50 percent) a 62.3 percent gain is all the better.
|
|
|
Upon our entry into AMEC Plc (AMEC) shares during April 2005, the company has undergone a huge transformation with management focusing on opportunities within the oil and gas services industry.
At the time, oil and gas services represented 25 percent of turnover, but with comparatively higher margins accounted for a third of profits. However, by the time we had waved goodbye to half our holdings 3 years later, the group’s Natural Resources segment was very much their cash cow accounting for two thirds of profits.
For this, huge credit must go to CEO Samir Brikho who in just 18 months at the helm had reinvigorated the group. Indeed, under his skillful leadership AMEC’s share price had doubled.
Having entered with the share price at £3.25 it was important to note that the preceding 10 years had turbulent for shareholders of AMEC. The shares increased close to sevenfold from 51p in 1996 to an all time high of 532p in June 2001 only to lose more than 75 percent of their value over an eighteen month period which started with the global economic downturn in 2002. However, as contrarian investors with a bullish outlook on the commodities sector, it was little surprise when we entered AMEC on the basis of sound fundamentals and an increasing exposure to a burgeoning natural resources stage.
In addition, the company boasted a number of key contracts with the likes of the Kuwait Oil Company, the Korean National Oil Company and Woodside Petroleum in Australia. All of which we felt could be built under the right management team.
And so it has proved. Samir Brikho maintained emphasis on margins rather than volumes to great effect. The implementation of various initiatives to drive shareholder value proved a success and will continue to do so. Indeed, we fully expect the benefits to continue to flow following the strip out of non-core businesses, completion of a cost cutting 'STEP' change programme, and instillation of an "Operational Excellence" plan.
From a strategic viewpoint the decision to focus on opportunities in resource markets was and is highly astute in our view. AMEC was already a credible player in the energy services sector and provided a new dimension to our exposure.
But we were not alone in our thinking, And recognition of the potential in this 'field' was being greatly appreciated by investors with the shares trading around 22 times forward earnings during April of this year.
We were concerned that the majority of city brokers now have AMEC on their buy lists - in our experience this is often a sure fire sign that a valuation is becoming stretched. As Members will know we try to 'zig' when others were 'zagging'. The time to buy AMEC was when it was a disorganised basket case several years ago. And as we have done many times previously, we felt it prudent to dispose of half of our holdings for £7.23 for a 133.4% gain.
Indeed we felt that the turnaround was nearing completion and the company's valuation suggested there was little margin for error going forward. However, half of our holding was retained and we continue to believe that earnings at AMEC will flourish given the initiatives in play.
We have much admiration for the manner in which a strong management team headed by the proactive Samir Brikho has transformed AMEC from a distracted support services company into one with unambiguous and accountable strategic path. Our decision to ‘sell half’proved astute, however, we look forward for a recovery in natural resources sector to drive activity at AMEC over the coming years. |
|