The Investment Column: LSE is not the place to visit after slump in trades

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The Independent Online


Our view: Avoid

Share price: 800p (+41.5p)

Oops! Of all the weeks that someone had to accidentally pull the plug at the London Stock Exchange, this was not the one to choose. It came just seven days after the official launch of the rival share trading market, Turquoise, which has been set up by a number of investment banks as a rival to Europe's main bourses.

Investors in the LSE have had a rather torrid time of things in the last year, with the stock down about 45 per cent, even though there has been a hullabaloo of rumours speculating on consolidation in the industry. The truth is that there is a credit crunch on, and this has limited the number of trades on the market: in August, the number of electronic equity trades was down 9 per cent on the same month last year, and with the number of initial public offerings drying up to almost zero, fees payable to the exchange have fallen.

That, however, could be good news for buyers. With a fall in activity, and as a consequence, a fall in the LSE's own share price, the stock is now pretty cheap. Watchers at HSBC argue that clients should be overweight, saying: "We divide our return on equity estimate of 17.9 per cent by our cost of equity of 7.2 per cent, which is calculated using the capital asset pricing model approach, and multiply this by the estimated book value of 515p. We then add our dividend expectation of 30p. Our new target is 1,310p." Those at Goldman Sachs would rather own Deutsche Börse, because it has upside potential of some 38 per cent, compared with only 9 per cent in the case of the LSE.

If the financial markets begin to improve, the LSE is an obvious buy. However investors would be better off avoiding the stock for a while at least in these uncertain times. Avoid.

Raven Russia

Our view: Cautious hold

Share price: 73p (+3p)

Investors in Raven Russia, a group that builds warehouses in Russia before renting them to other companies, have a dilemma.

On the one hand the group is doing pretty nicely, with net asset value (NAV) – the best way of measuring the value of property companies – on the way up. Indeed, the group stresses that a fall in pre-tax profits in the six months to 30 June, to $58m from $64m in the same period last year, is due to 2008 being earmarked as a year of building, and that the rents will come pouring in next year. Also, demand for commercial property is high in Russia, says the chief executive, Glynn Hirsch, and with space at a premium, it is getting higher.

However, despite all the good internal news about the company, the fact that it is in Russia is its biggest problem. No investor worth his salt can be unaware that Russia is becoming ever more belligerent in its attitude to its neighbours, and some backers of Russian companies are increasingly nervous. Raven Russia has operations in Ukraine, which has often irritated Moscow in the past few years.

Mr Hirsch concedes that investors' impressions of Russia, often based upon what they read in the media, could knock confidence, and as a consequence, Raven's share price. He argues, however, that with more than 90 per cent of investors being institutional backers, the "education" process is easier.

Watchers at Credit Suisse argue that the group is cheap: with an estimated NAV of a little over $1bn, "we arrive at a target price of 115p, implying 51 per cent upside potential to the current share price".

However, some investors will continue to be nervous about Russia, especially after its invasion of pro-western Georgia. The fact that the shares have fallen off by about 30 per cent in the past three months underpins this thinking. Cautious hold.


Our view: Buy

Share price: 204.5p (+3.5p)

Kofax, which issued its annual results yesterday, describes itself as a provider of intelligent capture and exchange solutions. For investors who may be baffled about what that actually is, they may still be tempted to invest after seeing adjusted pre-tax profits rising by 11 per cent, to £17m.

The group sells systems that allow companies to digitally process and archive documents and forms that would otherwise exist in paper form, speeding up, it says, retrieval times.

The company's new chief executive, Reynolds Bish, said yesterday that the group is a defensive punt in these markets as clients aim to cut costs by reducing the space that is needed for paper documents, and the staff needed to handle them. Execution risk, he says, is the only real concern.

Investors that like some robust analyst comment to support an investment case will be disappointed to learn that the watchers cannot agree. Those at Numis say that while they are tempted to increase the group's 200p a share valuation, based on 10 times current year enterprise value to net operating profit after tax, they are wary that the group is indeed exposed to cyclical pressures, even though it generally trades at a discount to the sector. Experts at the house broker, Landsbanki, are predictably more bullish, saying: "[looking] at take-out multiples it is easy to get a price target ahead of 300p".

There is little noise about a potential take-out, but the group is performing well. At a discount to the rest of the sector, it is worth a punt. Buy.