The Investment Column: Dip in equity prices casts cloud over Euromoney

Morse; BetonSports
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The Independent Online

Our view: Avoid

Share price: 422p (+10.5p)

The financial publisher and conference organiser Euromoney Institutional Investor unveiled record interim results yesterday. Operating profit came in at a best ever of £17.6m, up 17 per cent on the previous year and ahead of City expectations. The group is enjoying growth across the board with subscriptions to its various publications rising at a rate last seen in 1999.

Why is Euromoney doing so well? Quite simply global financial markets were booming during the six months to 31 March 2006 - the first half of the company's year. Banks, insurers and other financial institutions along with the lawyers firms and various advisers who support them are the people who read Euromoney's publications and go to its events. When times are good for them times they are also good for Euromoney.

Although in recent years the group has been busy trying to diversify its revenue streams across geographies and functions, it remains very sensitive to the state of the financial markets. The sharp drop in equity prices over the past few days does not bode well for the group. So far the retreat by stocks around the world is being described as a "correction" but if it turns into a full-blown "crash" profits at Euromoney will quickly evaporate.

During the last downturn, profits at the media group fell from £20m in 2002 to just £7.3m in 2003. Two years ago this column recommended the shares. Back then they traded at about370p. Yesterday, they closed at 422p, which left Euromoney valued at £370m, or 15 times forecast earnings, for 2006. That is broadly in line with its peers. But, given the clouds hanging over the financial markets at present, the stock is best avoided.

Morse

Our view: Hold

Share price: 80.75p (-18.25)

Just over a year ago the IT services group Morse issued a profits warning blaming pressure on prices and the commoditisation of the hardware supply business. Yesterday, the group once again disappointed investors after a poor performance at its German and Austrian divisions. Analysts now expect the two units to make a loss of £1m this year compared with hopes for a profit of £2m previously.

Morse is in the process of transforming itself from a company that simply installs computer systems to one that offers more complex systems integration services. By differentiating itself the group hopes to fend off the assault on its markets by traditional computer makers, who are increasingly supplying their wares directly to big business users, and keep its profits margins intact.

Morse's Germanic operations, which account for 18 per cent of total revenues, have so far made slow progress towards such reforms and are underperforming as a result. Nevertheless the company assured the City that elsewhere in Europe all is going to plan.

Despite the latest setback, now is probably not the time for investors to abandon the company. Its £121m market capitalisation is well supported by a £20m cash pile and zero debt. Once the management have completed their restructuring, Morse's fortunes should be greatly enhanced.

There is also much excitement in some quarters of the City about the group's joint venture with cash machines network Link. Named mobile ATM, the enterprise allows users to access their bank accounts via their mobile phones. HBSC recently became the first bank to offer this service to its customers, and if others follow suit the venture could become a major moneyspinner for Morse. Hold.

BetonSports

Our view: Buy

Share price: 160p (+3p)

BetonSports (BoS) doubled its Asia presence yesterday through the purchase of the China-focused Hooball.com and 777ball.com for an initial $22m (£12m).

The new businesses, which offer online sports betting and casino games, will be integrated into BoS' Easybets operating structure which is spearheading the group's drive into Asia. The move to extend its reach into China was a good one for BoS. Although the proportion of the Chinese population who are active online gamblers is still small, the rapid growth of internet availability will without doubt change this. In addition, it reduced the company's reliance on the US where there are ongoing worries that the government will launch a clampdown on the industry.

The Caribbean-based company also posted annual results yesterday. They made impressive reading. Profits soared 65 per cent to $20m, gaming volumes rose 25 per cent to $1.7bn and the dividend increased by 26 per cent on the previous year. Looking to the future, in the near term BoS should get a boost from betting on the World Cup. Long-term trends are also in its favour. The online gaming market continues to enjoy stellar growth and is not forecast to slow for some time. With BoS shares trading at just nine times forward earnings, the company is one of the cheapest in the industry. Buy.

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