Signs of maturity at Reuters

THE INVESTMENT COLUMN
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The Independent Online
Reuters' shareholders have had very little to complain about over the past few years. From 151p in 1990, shares in the news and electronic information group have risen steadily to a high of 560p earlier this month. The company has built up a pounds 600m cash pile and managed to keep sniping competitors at bay.

But more recently the picture has begun to look less exciting, with the company starting to exhibit worrying signs of maturity. At first glance yesterday's results for the six months to June were the usual impressive story. Pre-tax profits rose by 17 per cent to pounds 288m in the six months to June, on sales up 19 per cent to pounds 1.29bn. Instinet, the equities trading subsidiary, saw profits rise by 25 per cent to pounds 112m.

But comments from Reuters' chief executive, Peter Job, sent the shares 18.5p down to 536.5p - and had some analysts tweaking forecasts. He warned that growth in the second half was likely to be in single digits rather than the double-digit growth the company has grown accustomed to. There was also a decrease in the level of new orders.

Reuters faces several problems, particularly in its key "real time information" business, which supplies terminals to bank dealing rooms across the globe. First, the recent bout of merger frenzy in the banking sector means Reuters is left with fewer clients and an over-supply of terminals. Second, it is facing increased competition from rivals such as Bloomberg and EBS. On top of this, Reuters has been unable to increase its subscription prices for four years. And some banks have started to dispense with Reuters and deal directly with institutions such as the New York Stock Exchange.

All this is not as bad as it sounds. Reuters maintains that a smaller, healthier banking community, where subscriptions are rolled over, is better than a larger pool of weaker players. Mr Job was at pains to state yesterday that Reuters business from two US banks that merged two years ago was higher after the merger than before it. But that is unlikely to be so in every case.

Reuters has been trying to diversify into other areas with Reuters Financial Television, London News Radio and insurance information services. But these businesses are unlikely to yield the kind of margins Reuters enjoys elsewhere.

Reuters now has pounds 607m of cash burning a low-return hole in its pocket. A share buy-back or a big acquisition would solve that problem but neither appears to be on the cards. Collins Stewart is forecasting full-year profits of pounds 590m, which puts the shares on a forward p/e of 21, a big premium to the sector.

With better value elsewhere, in stocks such as Carlton and Reed, the shares are high enough.

Gloom persists at Lloyds Abbey

Despite a resilient set of interim profit figures, Lloyds Abbey Life, 62 per cent owned by Lloyds Bank, steadfastly refuses to lift the gloom surrounding falling life and pensions sales, stagnant house prices and the rising costs of regulation.

Pre-tax profits up 16 per cent to pounds 133.7m, a dividend up 7 per cent to 7.3p, and a spanking profits rise from the broker Lloyds Bank Insurance Services, up 42 per cent, were, however, at the top of expectations.

The shares closed 13p higher at 418p as the market shrugged off the cautious assessment of trading conditions.

Lloyds Abbey's downbeat comments appear to have been justified. Although it did well with sales of guaranteed bonds, customers shunned anything with an equity risk, such as unit trusts. Market conditions for many of Lloyds Abbey's businesses are abysmal, and likely to remain so for some time.

The results were also flattered by a bad first half last year, when sales staff had to be retrained in line with tough new sales disclosure rules. Sir Simon Hornby, chairman, is also cautious over the future, from house sales to car retailing. "We are still living in a time when people are reluctant to spend money," he said.

Most spectacularly, the estate agency chain Black Horse Agencies plunged further into the red, from a loss of pounds 2.8m last time to pounds 6.3m this. The German subsidiary Trans Leben also suffered from falling bond markets, trimming its loss to pounds 2.6m from pounds 4.5m last time.

The housing market is particularly worrying and cost-cutting is plainly paramount. Black Horse's branches have declined from 525 in 1988 to 360 at the beginning of 1995 and 343 now and the process will have to continue as long as costs exceed income. The one hope for housing, inflation, seems unlikely to return with enough of a vengeance to take up the slack.

Lloyds Abbey's price has been consistently supported by speculation that Lloyds Bank will finally snap up the minority stake, although there is no sign of an imminent deal.

Lloyds Abbey refused to comment on its parent's intentions. While more news may be forthcoming tomorrow, when Lloyds' own interims are due to be announced, it would be wrong to invest too much hope in a bid premium being sustainable. Lloyds may well have enough on its plate digesting the Cheltenham & Gloucester building society.

Takeover speculation aside, Lloyds Abbey's main investment attraction is its yield, which will be 6.3 per cent if it pays a dividend of 21p for the whole year, an appealing 50 per cent premium to the rest of the market. Fairly priced.

BT benefits are ringing clear

The small fall in BT's share price from 408p to 402.5p was a grudging response to first-quarter figures right at the top end of expectations. Ignoring a 12 per cent jump in pre-tax profits from pounds 781m to pounds 874m, the market chose to focus on further evidence of the competitive threat from the fledgling cable companies and the impact of price cuts imposed by Oftel.

BT reckons the latest reduction in call prices, introduced with per second pricing at the end of June, will cost pounds 300m in a full year. They didn't affect the first quarter, but slowing growth in call volumes held turnover back to pounds 3.5bn - a 3.5 per cent increase. Earnings per share were 13 per cent better at 9.2p.

The worries about cable, whose attack on local telephone calls resulted in a reduction of 60,000 residential line connections during the three- month period, are real enough, but they should not distract from the long- term picture at BT, which remains as attractive as ever.

While residential lines are under pressure, BT's more lucrative business custom remains buoyant. Connections in this sector increased by more than 5 per cent in the 12 months to June, with demand especially strong for the new ISDN lines.

BT reckons one fifth of all new business lines are ISDN. As they offer high-speed communications to small companies at a fraction of the cost of leased lines, their growth is assured.

Cellnet's customer base also continues to grow, with 162,000 new mobile phones connected to the network, taking the total to almost two million by the middle of the year. Turnover from mobile phones increased by a third compared to the previous year.

While sales grow, BT's cost base carries on falling as the workforce continues shrinking; 800 staff left during the quarter, but with the rate of decline slowing, the hit to the profit and loss account more than halved to pounds 22m (pounds 54m). Interest costs also fell after very strong cash flow, which saw debts fall by pounds 900m to pounds 1.3bn.

Other reasons to suggest that BT's shares remain good value are the increasingly favourable political outlook, with Labour prepared to look favourably on BT in exchange for its coveted national information superhighway, and a relationship with the regulator which, while difficult, is at least not deteriorating. Profits of just over pounds 3bn this year put the shares on a prospective p/e of 13. More importantly, they yield almost 6 per cent on a well-covered, growing dividend. Good value.

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