Broker’s results look good on the surface but there are challenges ahead

Willis produced a mixed bag of results today, but overall the company still faces significant challenges.

The good news is that net profits surged to $225 (£140) in the first quarter, compared to $35m in the same period last year.

The results also beat analysts’ expectations, and the company’s share price has shot up 13% since October.

Scratch the surface on those numbers though, and it’s clear all is not so rosy.

For a start, Willis UK is weak, with a mid-single digit decline in commissions and fees, while Europe’s growth is in low single digits.

Yes, economic weakness is pulling down results, but rivals such as Aon and JLT have undergone strong growth in the UK and Europe.

Aon has been helped by the establishment of GRIP, which is a turning out to be a big revenue earner, and JLT has had strong leadership from chief executive Dominic Burke.

Willis is behind Aon with its launch of the WillPlace database and the company last year suffered the distraction caused by major management departures, namely UK chief executive Brendan McManus.

Meanwhile, at group level, commissions and fees remain static at around $1bn. Then there’s the ever-troublesome Loan Protector business, acquired in October 2008 as part of Hilb Rogal & Hobbs (HRH), which continues to decline in performance.

Incidentally, the HRH acquisition has contributed to Willis having an operating earnings ratio of 3.1, higher than its major US rivals Aon, Marsh and Gallagher.

All this has meant Willis boss Plumeri has decided against offering guidance on future financial results. For such a City showman, so adept at wooing investors and analysts, that looks a tad weak.

But at least Plumeri can take encouragement from the fact that 2011 really was an ‘annus horribilis” and from here on, Willis can surely only improve.

Its share price is trading at a whopping 32 times earnings, which means investors, who could have easily dumped their stock last year and tanked the share price, instead stuck with the broker because they clearly expect results to improve.

That’s an expectation that is entirely justifiable. “Bring it on” is the company’s motto, although that’s something management would probably want to whisper with caution rather than shout from the rooftops.