Investors in the London Stock Exchange will have to wait until March to see what will happen to the cash piling up there, but the likelihood is that, unless Xavier Rolet, the deal-hungry chief executive, finds something else to buy, much of it will be going back to them.
Much of this bounty will come from the sale in the first half of next year of the investment management division of Frank Russell, the US business bought at the turn of the year for its indices arm. Investors will be aware that that bounty may be a little less than it might have been. The business was reported to be worth $1.8 billion in the summer to Citic Securities, of China; the collapse of the Chinese stock market, and the involvement of some Citic executives in investigations into the same, put paid to that and the eventual sale price was $1.15 billion.
Que sera, sera. The LSE’s pre-close trading update is, as ever, high on content and low on context, and makes no mention of the Russell sale. It also omits one of the negatives, the loss in autumn 2014 of the contract to clear trade at the London Metal Exchange by LCH.Clearnet, because this comprised all commodities trading and this line has been excised.
The rest of the business is moving ahead strongly. The LSE is so diversified, thanks to the various post-trade purchases carried out by Mr Rolet, that it is hard for one individual element to knock it off track.
The Russell indices business is now well integrated with the original FTSE operation. Cash raised on equities markets is running level with last year, helped by flotations such as Auto Trader and Worldpay, and issues from Standard Chartered, Glencore and BT.
There are new ventures coming forward such as CurveGlobal, a new derivatives platform set up along with customer banks along the lines of Turquoise, the equities trading venture. The only negative is a fall in clearing interest rate swaps, as trading in that market contracts. Regulators’ insistence that this must go through exchanges will help, as will the expectation of further rises in interest rates.
LSE shares, up 67p at £27.09, are trading at the top end of their all-time range. They sell on 22 times earnings. This is about in line with the sector and I would still see them as a good long-term prospect.
Price of Russell IM $1.15 billion
MY ADVICE Buy long term
WHY Shares are trading near their peak, but the multiple is not unreasonable within the sector, and prospects for initiatives are good
For an investor, Premier Farnell offers the worst of all worlds. This electronics distributor has got itself into all kinds of trouble over the past year or so, during which the chief executive departed. A replacement is being sought.
It and the larger rival Electrocomponents are hugely vulnerable to the smallest of falls in sales volumes; in Premier’s case, a 1.9 per cent decline in the third quarter to the end of October at its core business is bad news indeed. In the UK, the fault is mainly the company’s, while in the United States there is also a broad-based decline in the markets it serves. In particular, in the south its customers are reliant on oil, and in the western states they are in areas such as consumer electronics and aerospace.
The company is selling the non-core Akron Brass business, which makes firefighting equipment, and this will ease the pressure by cutting debt. It will, of course, also reduce earnings and cash received.
In September the company cut its dividend. The shares have fallen from above 200p in May. They added 2¾p to 94p on relief that the trading update contained no further bad news. On current dividend forecasts, they yield well above 6 per cent, which should provide some support. The company has instituted £19 million of annual cost savings and says dividends are affordable.
The dilemma is this: if markets get worse, the dividend may be unaffordable — or the new chief executive may follow a long tradition and cut it anyway. Brave gamblers might take the view that this is the bottom. I would be more cautious.
Expected gain from Akron £100m
MY ADVICE Avoid for now
WHY Risks are still too great to call the bottom
Groundhog Day all over again for Elementis, which has put out an entirely predictable trading statement and seen its shares tank, just as they did in June. It makes speciality chemicals, much of them from hectorite, an obscure form of clay that goes into paints and oilrigs to assist flow.
The negatives are well enough known. The strong dollar hits exports from the United States for its chromium side. There was a one-off gain in the year from a legal settlement and other things that brought in $5 million and will not be repeated. Currency effects are hitting sales of cosmetics in Latin America. Oil companies are spending less, Chinese construction has slowed.
Earnings for the current year will come in at the lower end of expectations. None of this should have come as any surprise, and Elementis is piling up the cash, important because its policy is to hand back half its balance at the year end to investors.
Its odd dividend policy makes the shares hard to value, but they fell sharply on that summer warning and lost another 15½p to 221¼p yesterday. They yield about 5.6 per cent, a good enough income.
One-off gains this year $5m
MY ADVICE Hold for income
WHY Much of the bad news in the update should be known
And finally ....
Some people worried earlier this year that Halma’s business model, which requires bolt-on acquisitions to provide much of its growth, would require ever-larger deals. They are certainly looking substantial. The company paid $110 million in October for a US fire protection business and has just announced the purchase, for a maximum of €125 million, of Visiometrics, a maker of ophthalmic diagnostic devices. Both meet the company’s criteria, though, of must-have devices and controls that command high margins.
