Life assurer, Friends Provident has had its fair share of publicity of late - not all of which has been to its advantage. Some of the darker moments include the failure to merge with insurance group Resolution, turning down what, with hindsight, would have been a well-priced takeover bid from JC Flowers, and then subsequently parting with the chief executive and finance director.
More recently it has been trying to offload its 52 per cent stake in F&C Asset Management, as well as its Lombard and Pantheon subsidiaries. So far it has met with little success and has abandoned the sale of Pantheon. Now it seems that entrepreneur Clive Cowdery could be interested in Friends Provident as a break-up target. It is a gamble because asset managers such as F&C are pretty bombed out right now, and the Pantheon Financial division failed to attract buyers at an acceptable level. Mr Cowdery is expected to reveal his plans to consolidate asset managers by the end of the month, and a bid for Friends Provident would allow JC Flowers to make a bid as well.
CAZENOVE
Outperform. Despite a recent run up on bid rumours, shares in Friends Provident are still trading at a 35 per cent discount to net asset value. A cost-saving programme is under way, and £11m of the targeted £40m had been achieved by the end of June. A 52 per cent cut in the interim dividend payment was more than we expected but, unless there are further cuts, the full-year cost of dividends will be £90m. However, management maintains that its strategy is not dependent on sales of any assets. Expect full-year EPS of 15.8p on an embedded value basis.
GOLDMAN SACHS
Buy. The lack of any news on the disposal front has been a disappointment, but there are a number of encouraging signs emerging. Despite the strategic review on selling its non-core assets, Friends has managed to hold onto its existing customer base, and has over £1bn in excess capital. What's more, its embedded value assumptions are on the conservative side - despite this the shares are still cheap in embedded value terms. Looking ahead, business margins could be boosted by more overseas business, where profit margins are greater. Expect EPS in 2008 of 12.1p.
