Fool's Eye View

[ March 10, 2000 ]

Singing a happy song

By Rob Davies (TMFEssex)

No one benefits from a bull market quite like a stockbroker or an investment bank. Results today from Singer & Friedlander (LSE: SFL) demonstrate that in spades. Operating income rose 10.9% to £307.4m, but group operating profit rose by a much more impressive 49.8% to £81.8m. Right down where it really counts, at the earnings per share line, the increase was best of all; a 51.6% gain to 20.4p, but the directors are taking a more cautious view of the future by only raising the dividend by 26.3% to 7.2p.

As the new chairman pointed out, all its businesses enjoyed favourable market conditions, particularly in the second half of the year. Singer & Friedlander is now one of the largest independent merchant banks left in the city after most of the others sold out to foreign banks. And, as the old Kleinwort hands are discovering, their future is now being dictated in Frankfurt and not Fenchurch Street. Anyway Singers' business is a classic mix of investment banking and stockbroking, although much of the stockbroking business is Scandinavian based.

The basic division of the company is threefold:

Operating Profits (£m)

Division             1999     1998

Merchant Banking     21.797   17.143
Stockbroking         63.445   37.889
Asset Management     10.92    9.687

The biggest gain came in stockbroking, a good reflection of the feverish activity in the markets last year. However, I do find it surprising that so much of the gain came from Carnegie, its broker for the Nordic markets.

Stockbroking Divisional Results (£m)

                     1999   1998

Carnegie           43.965  26.796
Collins Stewart    19.480  11.093

The result from Carnegie is very creditable as 54% of its revenue comes from securities broking, a business that is suffering intense competition from the Internet and other foreign firms moving into the region. With a market share of 8 or 9% in each Scandinavian country the firm is reckoned to be the leading independent broker in that area.

In the UK Collins Stewart also faced an increasingly competitive market but was able to increase profits in both agency broking and market making activities. Despite these good returns the parent company seems to feel that relying on stockbroking for 65% of its income in a bull market is too much exposure. Therefore, the company is considering an approach from the management of Collins to buy the business and is examining options to reduce its 55% stake in Carnegie.

Merchant banking had a good year too, and it joined in the latest trend of taking equity in companies it is advising. After providing pre IPO funding for Affinity Internet (LSE: AIH) it took options in lieu of fees. Some of these have been exercised and raised a total of £6.23m. But it still holds 427,000 shares, now worth £25m.

Perhaps it was this success that has driven the company's e-commerce strategy. So far it is mostly used for marketing, but it does have plans to offer Internet banking in the UK and the Isle of Man. I guess it hopes to repeat its luck with Affinity.

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