The Investment column: Reuters success story slowing

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The Independent Online
Reuters has been an amazing success story. From its journalistic origins in the 19th century, the group has developed into probably the world's leading provider of electronic dealing services and information to the financial markets. But growth has stalled over the past year. Since October, the share price has slumped from a high of 806p to 626p, down another 16p yesterday as foreign exchange worries prompted a wave of profits downgrades.

Certainly yesterday's year-end figures to December contained plenty to suggest that the double-digit growth rates in the business may be harder to come by in future. Pre-tax profits grew 17 per cent to pounds 701m, but the increase was only kept in double digits by a 1.6 percentage point rise in margins to 22 per cent, boosted by foreign currency hedging.

In fact last year's 8 per cent revenue growth slowed to 6 per cent at constant exchange rates in the fourth quarter and barely moved ahead once the impact of the pound is taken into account. Reuters warned the strength of sterling would "severely restrict" prospects for growth in 1997.

But while foreign exchange problems are likely to iron themselves out in the long run, there are clear signs that the underlying business is more mature than it once was. Reuters has grown fat on supplying the foreign exchange markets, which its information products and Dealing 2000-1 and Dealing 2000-2 trading systems dominate. Last year, growth in the two dealing systems slowed markedly, dropping from 23 per cent in 1995 to 9 per cent. Last year's quiet currency markets may now be- coming alive again as worries about European monetary union grow but, despite the group's optimism, its eventual arrival will hit Reuters' business.

The group is not sitting still. Instinet is at last making decent inroads into the equity trading market. This business, in effect an electronic agency broker that marries buyer and sellers of equities on an anonymous basis, was picked up in the US 10 years ago and has grown on the back of the burgeoning Nasdaq market there. Underlying growth accelerated from 34 to 40 per cent last year and revenues of pounds 346m are now just pounds 113m short of the foreign exchange products.

The great white hope is the 3000 range of information products, which combines up-to-the minute price information with extensive historical data on everything from shares and bonds to foreign exchange. Although order levels, at 14,700, are running ahead of plans, Reuters has some work to put in to convert its existing customer base of 200,000 terminals to the new system by the year 2000. So after five years of holding the line on prices, the group is warning that it is now offering incentives to switch, a move which will restrain revenues this year.

The group is also still left with the problem of its pounds 1.05bn cash pile, which it was blocked from distributing to shareholders last year. Profits of just pounds 710m this year, rising to pounds 780m, would put the shares on a forward p/e of 21, falling to 18. Hold.