Investment: Reuters chief warns of revenue downturn

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The Independent Online
REUTERS, the information giant, yesterday warned that this year's revenues would be hit by the financial turmoil in emerging markets and the rapid consolidation among the world's banks.

The chief executive Peter Job said economic crisis in Asia and Russia had caused a decline in orders for the company's news screens and trading systems in the last quarter of 1998.

He added that the fall would offset some of the price increases planned for 1999 and reduce sales. Mr Job said the gloomy economic environment and the prospect of further banking mergers were also casting a cloud over Reuters' near-term prospects.

He predicted revenue growth in 1999 would be below the 9 per cent rise recorded last year, when Reuters' turnover totalled a record pounds 3.03bn. His comments came as the information group reported the second consecutive drop in yearly profits, with 1998 earnings falling 7 per cent to pounds 580m. The decrease in earnings caused a 33p fall in the shares to 833p, wiping almost pounds 500m for Reuters' market value.

The figures were affected by the strong pound, which wiped some pounds 31m off operating profit, and by a pounds 78m shortfall in interest income caused by last year's pounds 1.5bn share buyback.

However, the numbers were boosted by a pounds 26m gain from the sale of several Internet stocks held by Reuters' in-house investment fund.

Industry experts took Mr Job's bearish words in their stride. They pointed out that the chief executive is famous for his cautious statements and predicted Reuters would weather the adverse market conditions.

Brian Newman at Henderson Crosthwaite said that although demand in most of Asia and Russia was weak, sales in Japan and the US - two of Reuters' key markets - were encouraging.

"The bear case was that screen [sales] would go down, but at the moment they are incredibly resilient," he said.

Looking ahead, 1999 is shaping up as a year of two halves. In the first half, earnings will be depressed by a number of technical factors arising from last year's return of capital to shareholders and the absence of currency hedges.

However, in the second half Reuters should benefit from a radical restructuring of its operations along product, rather than geographical lines. Cost savings should be limited at around pounds 20m a year but the increased efficiency should boost operating performance. Millennium and euro expenditure has also peaked at around pounds 40m in 1998 and is set to fall to around pounds 14m in 1999, freeing up funds for investment in new products.

The expansion of the Instinet, Reuters' Internet trading system, to the fast-growing European bond market should also boost sales and offset some of the decline in US revenues. On the negative side, the US court case on Reuters' alleged hacking of arch-rival Bloomberg's systems, could push the shares down.

But the investment decision comes down to the stock's valuation. The shares have had an incredible run since the start of the year. They are now on 26-times forward earnings forecasts at about pounds 650-pounds 700m - a 25 per cent premium to the market. They look a hold at these levels, but they should be bought if they fall further.