It would be surprising if Icap had not hedged ahead of any surprise change in the value of sterling in the light of the EU referendum vote. Its business model, after all, enables banks and institutions to take out derivatives and other instruments to prevent them from being caught out by abrupt movements on money and foreign exchange markets.
In the event, the broker was largely protecting itself against a higher pound and the currency went the other way. Icap gets 73 per cent of its revenues in dollars and 14 per cent in euros. The lower pound will have an immediate effect on profits translated from those currencies, but the hedging will limit this in the current financial year to the end of March. The true benefit will kick in during the next financial year and at today’s exchange rate would inflate earnings by 10 per cent.
This means that the shares, off 2½p at 450p, look a bit cheaper in earnings terms than when I last reviewed them in the spring. Across the group, though, the picture remains the same. The electronic broking side is still experiencing falling market volumes, though the Brexit vote provided a spike in business amid the turmoil on June 24. The more than $200 billion transacted on the foreign exchange markets is a bit more than twice what might be expected at that time of year.
There may continue to be some positive transactional effects as markets remain volatile. The sale of Icap’s voice-broking side is going through, the decision not to hang on to a near-20 per cent stake in the purchaser, Tullett Prebon, making things simpler all around.
That leaves the post-trade risk and information services, which will consist of about half the group. These are the growth parts of the business, driven by regulatory moves towards electronic platforms and the wish of banks to limit risk.
Once the Tullett deal is done, some wonder if Icap, or NEX Group as it will be known, might prove attractive to a predator. I doubt this, but the business will be a higher-margin, higher-growth one shorn of voice broking. This is a hard one to value, not least because changes to the dividend will reduce the high yield the shares have tended to enjoy. On below 20 times’ earnings they should go back on the “buy” list.
My advice Buy
Why After the voice-broking sale, Icap will be a different and higher-margin business just as the benefits from the lower pound kick in
Fenner
Fenner is still struggling against the headwinds in the American coalmining industry and oil and gas that have been a feature of trading over the past couple of years. Best known for its conveyor belts that are used in mining, it has bitten the bullet and indicated that the dividend will have to be cut by three quarters, which has lessened the support given by what was a good dividend yield.
The shares had been climbing from a very low base since the start of the year but lost ¾p to 166p after a trading update that suggested things are not getting any worse. One leading indicator is a slight increase in the US oilrig count, though this will not feed through into increased sales for its seals until the financial year beginning in September.
The US coal industry, where many of those conveyor belts go, continues to be difficult. Many miners there have been hit by cheap gas supplies are in financial difficulties. The weaker pound will be a benefit, because 90 per cent of earnings come from overseas and UK production mainly goes to export. On 22 times’ earnings, though, there does not seem much to go for.
My advice Avoid
Why There does not seem much upside at this level
GW Pharmaceuticals
GW Pharmaceuticals has raised $750 million or so from investors since it achieved a dual listing on the Nasdaq market in 2013. This certainly could not have been achieved had the company tried to do the same on the Alternative Investment Market, and it would not now be approaching US Food and Drug Administration trials for the twin applications of its Epidiolex compound that treat two rare forms of childhood epilepsy.
Investors on Nasdaq now account for more than four fifths of the total. The US market is more receptive to companies such as GW that are some way off first profits. Investors in the UK with long memories will recall its attempt to develop Sativex, another cannabis-based compound, to treat complications of multiple sclerosis, which it is fair to say failed to reach its early promise.
The latest $252 million cashraising had to be increased because of strong appetite on the part of those Nasdaq investors. The aim is to get Epidiolex into production in the UK, through the FDA trials and out into the workplace, where it has the potential to be a blockbuster drug with $1 billion of annual sales. This would feed through quite quickly to first profits, although none of the analysts in the US, where the company is studied more closely than in the UK despite being based here, have set a date.
The shares have been rising sharply this year but lost 33p to 580p. They can still be bought and sold on AIM but remain very much an unknown quantity and are still highly speculative.
My advice Avoid
Why Shares are still only for the brave
And finally . . .
Investors who bought into Poundland at the £3 flotation price have reason to feel aggrieved, though it is not necessarily clear at whom. The 222p-a-share offer from Steinhoff is probably about the best they could hope for, significantly more than the shares were worth in the market. There is not going to be a counter-bid and those who want to cash out and invest elsewhere could sell in the market. I would hold on. The deal will almost certainly go through, but the buyers have form for being left at the altar.
