Investment View: Icap catches the eye but LSE's a stayer

 

ICAP

Price: 330p

Our view: Buy

LSE

Price: 1025p

Our View: Hold

Both the London Stock Exchange and Icap are heavily reliant on trading volumes and, with the City still half asleep, times are tough for them. I last looked at these companies in February, making Icap a Buy at 390p on 21 February and the London Stock Exchange a hold at 920p a week later. The latter has proved to be good advice, with the shares nearly 10 per cent ahead of that. As for the former? You can't win 'em all.

It has been a tough few months for Icap, and that was made very clear in the company's trading statement on Wednesday. However, despite its difficulties I am not inclined to head for the exit. Here's why. The difficult outlook, fuelled by a sullen global economy and the continuing horror show in the eurozone, is behind the falling revenues at Icap. They dipped by 14 per cent fall in the six months from April to September. That was a shade worse than some had feared, but the company says that even if trading fails to pick up (and it did in September), it will still meet forecast earnings of between £307m and £346m for the year to 31 March.

That is a reduction on the previous range. Analysts have lowered their forecasts to account for the sluggish climate. But it's not bad, all things considered, and there are grounds for thinking Icap can pick up from here.

Its chief executive and founder, Michael Spencer, has considerable cost flexibility (£50m annually has been excised), because this is one City company where the richly rewarded boys on the trading desks have to make do with less when times are hard.

Management has been reshuffled, and attention given to the poorly performing foreign exchange trading platform. US regulators will provide clarity soon on the important interest rate swaps market, which will remove a source of uncertainty.

Icap trades on a light multiple of nine times those forecasts for the year ending 31 March 2013. Meanwhile it offers a bonanza yield of 6.6 per cent and the dividend is 1.8 times covered by earnings. Mr Spencer, who remains the biggest shareholder, would probably rather cut off his own nose off than cut the payout.

So, although my recommendation in February doesn't look too clever, I believe the shares could look cheap at their present level when time comes to revisit them in February. Buy: Icap is in the repair shop at the moment but it could be motoring again soon, even if the road ahead is bumpy.

As for the LSE, the chief worry in February was that it could be tempted to do something silly such as overpay for the London Metal Exchange. The latter was ultimately sold to a Hong Kong-based buyer for £1.4bn, despite the fact that it hardly makes any money. It is hard to see the metal exchange justifying that price tag for quite some time, if ever. History has proved that the LSE should have paid up for Liffe, the London futures exchange, which it lost to Euronext (now owned by the New York Stock Exchange). But the LME is nothing like such an attractive purchase.

In the meantime, the LSE has finally made progress on another major deal: buying majority ownership of LCH.Clearnet. That company acts as a buffer between buyers and sellers of a variety of financial instruments and ensures deals are closed if one party defaults. Its business is growing and it will help to diversify the exchange's sources of revenue further.

Trading volumes in London between April and September fell 20 per cent and they were down by 16 per cent in Italy where the LSE runs the Milan Borse.

Revenues from new companies coming to market also took a tumble, thanks to a dearth of new listings. There wasn't much to smile about, although the number of professional terminals out there was better than expected, and it signifies faith in the market that the shares didn't fall heavily after a disappointing trading statement.

This suggests that traders like what chief executive Xavier Rolet is doing, and agree with his view that the group can cope with the difficult environment. At 10.9 times forecast full-year earnings, yielding a little less than 3 per cent, the shares aren't a bargain. But I'd still hold them.

Start your day with The Independent, sign up for daily news emails
News
people
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Sport
The RBS Six Nations trophy at the Aviva Stadium ahead of Ireland vs England
rugby
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
ebooks
ebooksA special investigation by Andy McSmith
Arts and Entertainment
Kanye West found himself at the centre of a critical storm over the weekend after he apparently claimed to be “the next Mandela” during a radio interview
music
Sport
Wes Brown is sent-off
football
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
News
i100
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?