Shares in personal insurance provider CPP have been clobbered on news that the Financial Services Authority (FSA) is investigating alleged failings in the way it sells UK credit-card and ID protection products, activities that may account for about 60 per cent of CPP's revenue. All but the bravest shareholders should exit now.
The main financial blow so far is that CPP has suspended sales of its ID Protection product. It hopes to have a new product on the market in six weeks that does not include any insurance, the FSA's bug bear. It will need to recognise revenues from the new product over its entire life rather than taking the lot upfront. So 2011's operating profits are expected to be below City forecasts. "My sense is that this is a new product and this is a necessary tweaking process," says Henry Carver, an analyst at broker Peel Hunt.
This is a big disappointment for a company whose shares only came to the market a year ago at 235p. If the issues can be resolved relatively painlessly then there could be good upside following the fall in the share price to 160p. However, the FSA investigation could take a long time and creates substantial uncertainties about the possibility of refunds to customers, CPP's sales operation and its relationships with key partners.
"On my numbers [the shares] now only trade at about 6 times [expected earnings],! says Michael Donnelly, an analyst at broker Canaccord. "But it is often surprising how long things can trade at 6 times for."
Price: 269p
When: 24 Sep 2010
Performance: -41%
