Investment Column: Shareholders won't let LSE go for a song
Pursuit Dynamics; Brooks Macdonald
Thursday 21 July 2011
Our view: Buy
Share price: 1,030p (+33.5p)
Is there any point in discussing the London Stock Exchange's financials when considering the shares?
Even if yesterday's trading statement were dreadful (it wasn't) it would hardly matter – surely the only relevant issue is whether the LSE will be bid for and when?
But just for argument's sake, let's have a look at the numbers anyway. The exchange operator enjoyed a solid first quarter. Total revenue grew 14 per cent to £190.2m, while revenue from the main trading markets increased 4 per cent to £79.7m.
The level of trading in shares and derivatives was sluggish, but was offset by active trading in bonds thanks to the European sovereign debt crisis and a pick-up in flotations.
The summer period is usually slow, but chief executive Xavier Rolet had encouraging things to say about the flotation pipeline and other financials which should enable the company to continue posting decent numbers.
Now, we last looked at the shares in January, when we advised a hold at 873p. That has proved sound advice. But the fact is that the consolidation of Western exchanges into two big groups is not complete and Asia has barely started. Against this backdrop the LSE is and remains a major prize, with London still the largest European exchange by volume.
Over the years there have been some frankly stupid takeover bids, tabled at less than the shares' prevailing market price. Both Macquarie and Nasdaq told shareholders that they should take lowball offers for "certainty". Fortunately LSE investors were made of stronger stuff.
The sovereign funds that sit on the LSE's shareholder register bought in at a pretty price and will clearly block any deal that forces them to exit at a loss. So a bidder, whether Nasdaq (again) or an Asian exchange will have to pay up to bring them round.
Then there is the valuation. The group trades on a forward earnings multiple of 12 times, which is hardly demanding, and adds to the case for in buying once again.
Our view: Buy
Share price: 325p (+6.25p)
Pursuit Dynamics made its name in with some whizzy technology, including its reactor system used in brewing and its atomising system for putting out fires which involves injecting high-speed gas into fluid.
The group's kit also helps fight against biological and chemical hazards. Yesterday, it revealed a 50/50 joint venture with Biomimetics Health Industries that uses Pursuit's atomising technology and Biomimetics' chemistry expertise. The life sciences group specialises in "nature replicating" products that kill contagious pathogens including MRSA and E.coli.
Pursuit's chief executive officer, Roel Piper, said this market offers the two companies "huge potential".
Crucially, the deal came just a week after shares leapt on news that Pursuit was trialling its PDX waste-to-energy technology at a Thames Water treatment plant in Reading. This could open up a whole new revenue stream for the company, according to City analysts, who backed the stock.
Together, the updates point to good prospects for growth. But what about the share price? Merchant Securities, whose analysts reckon that Pursuit will start to generate in the next financial year, put the stock on around 15 times forward earnings for next year. This is encouraging, not least because the share price has tumbled since peaking at 700p in December.
Our view: Hold
Share price: 1,272.5p (+18p)
Brooks Macdonald continued its run of strength yesterday, announcing that its full-year results would be ahead of forecasts. The wealth manager was able to outperform its own expectations even after a £545,000 Financial Services Compensation Scheme levy.
At the end of June, funds under management were £2.97bn – up 6 per cent from the end of March.
Brooks already has a reputation for efficiency that sees hefty chunks of new business flow through to the bottom line. It has also broadened its offering with the launch of Brooks Macdonald funds, which combines existing funds with specialist funds acquired when it bought the property specialist Braemar a year ago.
Still, the shares have had a good run. Moreover, they now trade at about 25 times estimated earnings, according to Bloomberg, and with most of the good news in the price we do not think they have much further to go.
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