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



Price: 330p

Our view: Buy


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.

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