LSE offers hope of solid earnings

Maiden; LiDCO
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The Independent Online

The capital markets are virtually closed to business, the appetite for equity investments is weak. Clearly, it is not the ideal business environment for the London Stock Exchange.

When the City's flagship institution floated on the public market in July, pundits forecast a recovery in the equity markets towards the end of the year and investors snapped up LSE stock. The US terrorist attacks raised fresh worries about the LSE's prospects, linked as they are to those of the capital markets.

For what it was worth, the LSE's trading statement yesterday showed the business in good health during the five months to the end of August. Sure, company flotations – a source of lucrative fee income – were down almost a third. But secondary share offerings were buoyant, helping the LSE's issuer services division raise £95bn in the period, a year-on-year rise of £5bn. The LSE's trading unit ("broker services") enjoyed a 28 per cent uplift in the number of transactions in the period. The third leg of the business, the provision of market information to financial group, saw a 10 per cent increase in terminal numbers.

The worry is weakness in fee income from companies pursuing share issues. Chief executives are warier of tapping the markets to fund big deals or ambitious investment plans, and corporate activity will largely be restricted to all-cash deals for a while.

Comfortably offsetting this, the Exchange will benefit from continuing stock market volatility, which has seen trading volumes hit record levels. The information business provides solid cashflows, and a huge cash pile offers hefty interest income. It also gives Clara Furse, the LSE's chief executive, scope for opportunistic acquisitions in the downtrodden tech sector. HSBC expects earnings per share of 16.8p this year, rising to 17.3p in 2002. That puts the shares, up 4.75p at 307.75p yesterday, on a price-earnings ratio in line with the market. The growth on offer is unspectacular, but the earnings look more solid than those of many alternative investments.

Maiden

It really was too good to be true. Maiden Group, the billboard advertising specialist, said yesterday that customers have deserted it since the August bank holiday and it cannot now meet market estimates of 13 per cent earnings growth this year. Not that surprising, as companies have been slashing ad budgets for more than a year as they shore up profits in the ropey economic climate. Yet outdoor advertising has seen extraordinary growth in recent years and analysts reckoned it could withstand the worst.

Actually, it has. In the six months to June, for which Maiden posted a pre-tax profit down 32 per cent to £2.2m, outdoor advertising revenue grew 3 per cent. Maiden's sales were up 8.4 per cent to £41.2m.

The US attacks have made matters worse, prompting campaign deferrals by advertisers such as British Airways. Maiden has waived cancellation fees for clients directly caught up in the attacks, such as the broker Cantor Fitzgerald.

The long-term future for Maiden remains secure, and its large salesforce means it should gain quickly from an upturn. Outdoor advertising will continue to eat into ITV as television audiences fragment, and industry forecasts suggest 10 per cent of ad spending will be on billboards by 2004.

Over the economic cycle, top to bottom, outdoor advertisers have traditionally traded at about 18 times earnings before interest, tax, depreciation and amortisation. Maiden shares, down 45p to 232.5p, stand on a multiple of 8.5. The dramatic sell-off provides an opportunity for investors able to hold their nerve over a few more bumpy months.

LiDCO

Forget B2B, the hot new technology area is beat-to-beat. Heartbeats, that is, and LiDCO has just begun selling equipment that monitors bloodflow through the heart in patients awaiting an operation.

Interim results yesterday, showing an in-line loss of £1.5m, gave the group a chance to assure investors that things are going according to plan. But it has much to prove.

Floated at 140p in July, its valuation has only now come down near levels that recognise the risk that doctors – a stubborn breed – might not take up the new technology in quite the ambitious numbers targeted. LiDCO said yesterday that 33 US hospitals have "made a purchase or requested a sales proposal"; it didn't say that only five of those have turned into actual sales so far.

It also remains to be seen what method of payment hospitals will prefer. While LiDCO would rather they paid upfront for the equipment, the small early sample is not enough to be sure that it won't have to rent out the machinery.

Up 2p to 76.5p, the share price puts LiDCO on an enterprise value to sales ratio some 14 times higher than its more advanced rival, Deltex. One only for the brave.

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