London Stock Exchange
Revenue £1.16bn Dividend 10.8p
It is a measure of how far the London Stock Exchange has changed under Xavier Rolet, the chief executive who arrived in 2009, that its indices business should account for more than a quarter of all revenues next year.
Before the purchase of the remaining half-stake in the FTSE indices in 2011, that business barely moved the dial when the LSE reported figures. Now it has been amalgamated with its equivalent within Russell, the American company bought at the end of last year.
The halfway numbers showed the impact on its LCH. Clearnet business of the loss from last September of the contract to clear for the London Metal Exchange, which had been widely signalled beforehand. This accounted for nearly a fifth of LCH’s revenues at one stage and, on an organic and constant-currency basis and setting aside earnings incorporated from the Russell indices business and unfavourable exchange rates, total LSE income was flat and adjusted operating profits down 5 per cent.
The original equities business is doing well enough, even if the volume of new cash raised is off by 18 per cent. The comparison is with a period of some substantial London flotations, such as Saga, and a slowdown in new issues in the run-up to the election.
The LSE has yet to sell the unwanted investment management side of Russell, which contributed about £500 million of revenues. This will bring in about $1.25 billion when it is sold at the end of the year or perhaps shortly thereafter, and it raises an interesting question. Mr Rolet has done a number of deals, including the LCH and Russell moves, but another of any size looks implausible. The borrowing ratio, though, is already back within the company’s target range. The proceeds of sale, therefore, look surplus to requirements and the LSE is promising to review its capital structure when it announces results for 2015 in March.
This raises the prospect of some sort of return to investors. On the other hand, the shares have been strong performers and, up another 42p to £26.20, now sell on 22 times’ next year’s earnings, once Russell is fully bedded in. I tipped them at £24 in the spring, but I would think about taking some profits.
MY ADVICE Take profits
WHY There is a potential return of capital next year, but this is not guaranteed and LSE shares are selling on a high multiple
Unite Group
NAV 521p a share, up 20%
The student accommodation market has been one of the best performers in a property market that itself has been setting records, and there seems no reason why that run should not continue.
The next academic year’s intake of students looks like hitting a new high, of 540,000 or more, helped by the removal of a cap on those numbers.
So universities are becoming nervous and booking rooms further ahead of time. Unite Group, which specialises in providing such accommodation, says that it is 90 per cent booked for next year, against 85 per cent this time last year.
Unite’s problem is finding sufficient new sites to satisfy that growing demand. Some areas, such as London, are almost impossible to put new build into, such is the competition from the housebuilders.
The company has planning permission for sites in Edinburgh and Coventry and has identified three more in unidentified university towns to complete by 2018, bringing in another 1,800 new beds to a portfolio of about 45,000, half of them fully owned.
Unite typically gets a return of 8 per cent or more on new developments while paying 3 per cent and a bit in interest, so the strength of the model is clear enough. The shares, up 10p at 654½p, have run strongly ahead since the autumn and trade at a 26 per cent premium to net assets.
Some might be tempted to take profits. Given the intention to double earnings over the next four years, I would be inclined to buy, on the promise of a 4 per cent-plus yield.
MY ADVICE Buy long term
WHY Student market can only continue to grow
Legal & General
Operating profits £750m, up 18%
One door closes and another one opens. The 2014 budget may have made personal annuities less attractive, but Legal & General is doing well out of bulk annuities, providing companies with a full pension service across the workforce.
The accounting for such assets is complex, but while L&G suffered a 53 per cent fall in individual annuity premiums in the first half, there was a near-£5 billion rise in total annuity assets. The company is moving to an “asset lite” model, offsetting longevity risk on such assets by reinsuring it, and this not only allows it to cope with forthcoming regulatory requirements to hold extra capital but also allows it to write more business.
Other than that, L&G is an easy enough business to understand, because it updates the market regularly on cashflow and resulting profits, which gives a clear enough idea of dividends. Operational cash generated was up 8 per cent to £624 million and operating profit up 18 per cent to £750 million.
Full-year dividends of 13.2p are in prospect, suggesting a forward yield on the shares — up 7¼p at 270¾p — of 4.9 per cent, a good enough reason to own them.
MY ADVICE Hold for income
WHY Cashflow is strong enough for dividend growth
And finally . . .
An unusual deal arrives from Cohort, the maker of sophisticated defence equipment such as drones used in Afghanistan. It is buying a Portuguese maker of advanced electronics and communications equipment. The cost is fairly small, £13.3 million, and the company supplies much the same customers as Cohort, so expanding its product range. The company is being sold as part of a privatisation programme by the Portuguese government, which would suggest that the price is a good one.
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