Investment Column: A bitter pill for Icap but hold on for better

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The Independent Online


Our view: Hold

Share price: 381.4p (-10.1p)

On the face of it, there are two ways of looking at Icap's decision to turn its cash equities business to an execution only service (in Europe and Asia). Many in the market had been hoping for a sale of the division and in short term, therefore, will no doubt view the lack of a deal as a negative. In the longer term, however, the shake-up, which will affect 114 jobs, is a positive, as it removes a drag on the performance of the blue-chip money broker, whose business involves helping banks trade a huge range of financial instruments anonymously.

The discontinued business clocked up operating losses of about £25m in the year to the end March – more than the £18m loss that the market was expecting, according to Panmure Gordon. The company said yesterday's move will result in a pre-tax charge of a maximum of £51m, a bitter pill to swallow but it is a price worth paying, in our view. By dealing with the problems in cash equities, Icap can now focus on the other potential threat to its profits – regulation.

The first thing to be said here is that there is little clarity about what the ultimate, post financial crisis regulatory environment will look like (still). But, acknowledging that the final rules may be more unsettling that we imagine, we are currently inclined to side with UBS, which a few weeks ago said that new rules were more likely to "upgrade" rather than "overhaul" the over-the-counter derivatives markets where Icap is such an important player. This means that we are likely to see more transparency, more central clearing and electronification, and more use of post trade organisations to settle trades.

Icap should be able to deal with all this in relative comfort, although there could still be nasties on the way. Another plus point is chief executive Michael Spencer's decision to drop his political aspirations to focus on steering Icap through these choppy waters. On 12.6 times JP Morgan Cazenove's forecasts for 2011, the shares look fairly valued. But despite the uncertainties, this is a high-quality business. So hold for now.


Our view: Buy

Share price: 100.5p (+13.3p)

There are a number of companies that have had a good recession. Most, if not all of these, are those that help clients save on costs, which has generally been top of every chief executive's wish list for at least two years.

Regus, the group that offers both office space and "virtual office space" to clients is one such company. Yesterday, it published its annual result, saying that pre-tax profits had hit £86.9m, beating the analysts, who had collectively bet on £76.2m.

For investors there was plenty to get excited about: the shares jumped by 15 per cent, Regus increased the dividend by a third to 1.6p, and chief executive Mark Dixon said he was "cautiously optimistic" despite the outlook remaining "unclear". For the uninitiated, cautiously optimistic is management speak for, 'we're on to a winner, but it would be a bit crass to sing and dance about it'. Analysts at the group's broker, Investec, were equally gushing, hailing long-term prospects as "very attractive".

So what's the catch? Well, the shares – trading on a multiple of 23.7 times this year's forecast earnings – are by no means cheap, and despite the impressive profits, year-on-year revenues were broadly flat. We would not let that worry us, however. The dividend yield was already a promising 2.5 per cent before yesterday's increase, and we would back the stock to rise further. Buy.

AG Barr

Our view: Buy

Share price: 910p (+9.5p)

The most recent adverts for Irn Bru made fun of the High School Musical films that used the refrain "it's fizzy, it's ginger, it's phenomenal". It is the enduring popularity of that drink with its indescribable taste that helped owner AG Barr to a 20 per cent boost full year in pre-tax profits. They rose from £23.1m in the 12 months to 30 January 2009 to £27.9m a year later. Turnover was up 18.7 per cent as the company's Barr cherryade and orangeade sold well as did the KA Caribbean range. Barr was also boosted by its acquisition in late 2008 of Rubicon, which is performing ahead of expectations. All this and the dividend was up 10 per cent.

The outlook appears buoyant too. The company has warned of the "additional challenge of substantial operation changes across 2010 and 2011" as it invests £10m in new production capacity and shuts a site. But the first seven weeks were ahead of last year, despite tough comparitives.

Net debt fell from £31.3m at the end of the previous year to £22.1m and the soft drink market looks relatively recession-proof. House broker Investec has the group on 9.4 times 2011 forecast earnings, which is an undemanding rating. There are one or two uncertainties around, it's true, but these shares are solid. Buy.