There are two problems in evaluating the London Stock Exchange’s share price. One is the lack of independent analysis on the stock, given how many investment banks are tied up in the merger with Deutsche Börse.
The second is that, as a nil premium merger with both companies taking shares in the merged group, it is almost impossible to put a price on what LSE investors are getting from the deal. The assumption is that the €450 million of cost savings promised make LSE shares worth holding until such savings come in.
This means taking a long-term view on whether the 24 times earnings multiple the shares are trading on is justified, on the basis of that eventual outperformance. The shares, up 29p at £28.42, are trading at the top of their range, aided by a post-referendum boost because so much of the revenue is in dollars and euros.
Frank Russell, the last big acquisition, is still bedding in, although the group says integration is running ahead of schedule and is on track to produce annual cost savings of £51 million. What is known is that LSE investors are getting 46 per cent of the merged company and Börse shareholders 54 per cent. These terms are impossible to alter but they increasingly look lopsided, given the high rate of growth the LSE is experiencing. On a headline basis, third-quarter revenues were up by 19 per cent; strip out the currency effect and they are still ahead by 9 per cent, impressive by any measure.
When this column last looked at the LSE in the spring, there was still the prospect of a counter-bid. This possibility has entirely evaporated.
Meanwhile, opinion on whether the Börse deal will complete remains mixed. It should clear the EU competition authorities, given the offer to sell LCH’s French business. Any other hurdles will be purely political.
Those third-quarter figures show a good performance from capital markets as market volatility will have encouraged trading. However, that same volatility discouraged uptake of FTSE Russell index products. Swings and roundabouts, then. Given the above uncertainties and the high level of the shares, nervous investors might consider taking some profits.
My advice Take profits
Why LSE shares are trading at the top of their range. There are still uncertainties over the Börse merger and the earnings multiple is high
Rathbone Brothers
The whole industry of providing advice to wealthy individuals is changing fast, while volatile markets are providing their own challenges. Rathbone Brothers is also investing in its distribution network; its performance in the three months to the end of September may look subdued but is respectable enough.
Funds under management grew by £2.6 billion to £33.3 billion in the quarter, but £2.1 billion of this came from market movements. Of the £511 million of net inflows, £170 million came on the unit trust side, which is encouraging given losses elsewhere in the sector.
Rathbones is investing £5 million to £7 million in the current year, including setting up a private office that will target ultra-rich individuals with anything up to £100 million of disposable funds.
That investment will depress margins in the short term; these are now running at a little bit below the targeted 30 per cent. The long-term drivers for the industry are still there.
Rathbones shares have come off quite sharply since the start of the year, when they were trading at above £23 but, up 34p at £17.99, they still sell on almost 16 times earnings, which does not suggest much upside.
My advice Avoid
Why The shares have come back but still look expensive
Senior
A profit warning from Senior yesterday was not the first time the company has startled the market with unexpectedly bad news this year. A bullish outlook statement in April was followed by a profit warning in June, relating to the Flexonics division, which supplies makers of large trucks and the oil and gas industry.
By August the management were sounding quite chipper again, the company being “well positioned” with “good organic growth” in the large commercial aircraft market. That side was the main source of yesterday’s warning, again coming two months later.
This is another of those warnings where it could all have been much worse, but for the decline in sterling. Revenues for the first nine months were up by 7 per cent; take out currencies and acquisitions and the fall was 4 per cent.
The outlook for Flexonics continues to be challenging. There are a range of issues affecting the aerospace side, including a slower than expected ramp-up of some of the big new commercial programmes, partly down to slow delivery of the new engines, “certain supply issues” with the producers of engineered goods that should be resolved by the end of the year and continued wrangling with customers over potential price increases.
Analysts were downgrading their profit forecasts by anything up to 10 per cent. The shares were as high as 360p in April; they ended down 27¼p at 177p yesterday. They sell on 11 times this year’s earnings but investors should remain cautious.
My advice Avoid
Why There may be further upsets ahead
And finally . . .
It seems a long time since Aggreko was one of the market’s favourite growth stocks, with its ever-growing fleet of temporary power generators, and enjoying a correspondingly hefty price earnings multiple. There has been the odd stumble on the way and the shares, above £20 in 2013, are now well below £10 and lost another 9 per cent on a negative report from Credit Suisse. The broker says Aggreko could even lose its position as global leader in temporary power to the rather less well known Karpowership of Turkey.
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