Bottom Line: Reuters needs good news on latest ventures

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The Independent Online
'THE financial services industry is not a Jurassic Park of any kind,' said Peter Job, chief executive of Reuters Holdings yesterday, anxious to dispel the idea that the company's proposed pounds 350m share repurchase marks a failure of imagination in a dull market.

Reuters' interim results show, encouragingly, that life is stirring among the denizens of the banking and securities world. A European Monetary System crisis works wonders.

New orders have turned the tide while underlying profits growth and surplus cash generation remain solid. A 17 per cent dividend rise to 6.2p completes the picture.

What the results did not illuminate, however, is how successful the hyped new ventures such as Globex and Dealing 2000-2, transactions products for the derivatives and foreign exchange markets, will be. These are live examples of where Reuters will be investing future cash flows.

Globex is suffering from low volume on the Chicago financial futures market, a matter of concern to Reuters, while the true test of Dealing 2000-2 and its 900 installed key stations will come with the imminent launch of the rival, US bank-backed EBS dealing system. Neither is yet contributing significant revenues.

News from the core business is steady progress. Revenues grew by 20 per cent to pounds 895.8m in the first half or by 5.7 per cent once a considerable currency boost is removed. Installed video terminals rose by 2 per cent during the six months.

Reuters is much more coy about the trend in underlying profits. There were substantial translation gains within a 19 per cent rise in operating profits to pounds 184.1m but the picture is muddied by a pounds 30m shift to forward hedging losses of pounds 23m and the absence of last time's pounds 15m rationalisation charge.

Cash balances actually fell by pounds 80m during the half but this is more than explained by a pounds 119m advance corporation tax payment in January, a key element in the tax credit accompanying its share repurchase, which is due to be repaid in the current half.

Despite this and lower rates, interest earnings slipped slightly to pounds 30.6m helped by hedging gains generated by the active Treasury function.

Hedging remains a wild card and interest will be down, but underlying profits growth of 10 per cent should take pre-tax profits to pounds 445m this year for a prospective p/e of around 18 and a likely yield of 2.2 per cent at 1,444p, up 4p. A fair rating but good news on new products would help to support it.