Over the past ten years, the insurance industry has experienced seismic change. Markets have been deregulated and new technology, the internet in particular, has led to greater price transparency and more competition. Canny consumers can save literally hundreds of pounds by going online to find the cheapest cover. With lower barriers to entry, new operators such as banks, supermarkets and low-cost providers such as Esure have flooded the market, pushing prices down. Existing providers have been faced with the harsh reality of shaping up or going bust. While some have gone to the wall, most have survived by slashing costs and outsourcing non-core activities. Thousands of UK jobs have been lost as many insurers have upgraded their software and outsourced the whole process of claims management to specialists, such as this week's tip:
Tip of the Week: The Innovation Group (TIG, 32.75p), tipped as a BUY by ABN Amro and Altium Securities
Innovation offers first-rate information technology and outsourcing expertise, tailored to the insurance industry. It has more than 100 clients, including established providers (such as AIG, Zurich, Aviva and Direct Line) and newer operators, such as the RAC, Chubb, Siemens and Toyota. The group operates across North America, the UK, Germany, South Africa, Australia and Japan.
Innovation's software handles policy and claims management, which reduces its customers' costs by improving efficiency. The firm's outsourcing division, which generates recurring revenues and accounts for 70% of sales, helps clients to convert prospects into policyholders and manages every step of the claims process from quotation to compensation.
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So far, so good. But how is the business performing? Well, the company is in very good shape. Last week, in a pre-close trading statement, the board was upbeat. Results for the year to September 2006 are set to meet expectations. There was "strong organic growth in both adjusted profits and sales, with recurring revenues rising significantly. Outsourcing had an excellent year while software also performed well, underpinned by the signing of new contracts and the successful execution of key milestones".
Both ABN Amro and Altium have reiterated their buy recommendations
on the stock, forecasting organic sales growth of 17% to 20% for the year, with turnover and earnings per share (EPS) of £79m and 1.8p respectively.
For the next two years, EPS are expected to rise further, to 2.6p in 2007 and 3.3p in 2008, which will put the shares on forward p/e multiples of only 12.5 and ten. This looks far too cheap for such a
high-tech outsourcing business with strong recurring revenues. Moreover, the balance sheet is strong, with about £20m of net cash.
So what are the downsides? Innovation is a small-cap stock operating in a global contract-based industry. But I would rank the shares as only medium risk, due to the company's excellent customer base and high-quality earnings. Altium Securities has a 40p target for the stock.
Recommendation: Good value, BUY at 32.75p (market cap £147m)
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