This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
QUALIPORT
By
Up until last week, the London Stock Exchange (LSE: LSE) had one investment uncertainty -- its management. Then came news of a £162m special dividend (worth 55p per share) within the company's annual results. As explained here, special one-off payments indicate a firm run by management that is sensible enough not to be tempted by grandiose or aggressive (i.e. risky and costly) expansion schemes. But not that long ago, the Qualiport firm seemed all too keen to spend its cash hoard in a very cavalier manner. In what became a three-way auction, the LSE was prepared to pay £580m for LIFFE in 2001, a deal that had few obvious synergies, yet valued the London futures exchange at about forty times earnings. The LSE subsequently lost out in the bidding and -- thankfully for shareholders -- the board's corporate ambitions appear to have cooled subsequently. So, with its directors acting in a more reassuring manner, the LSE offers fantastic buy and hold features for investors. It's a visible, easily understandable, domestic monopoly, which enjoys a sustainable competitive advantage, plenty of repeat business, accounts to die for and, now, level-headed management. There's no such thing as the perfect company, but the LSE is probably as close as they come. More about the operational strengths of the LSE can be found here, here, here and here. Results The table below shows the LSE's five-year financial record:
(*Before exceptional items. All figures adjusted for goodwill.) The weak growth stemmed from under-performance within the LSE's Information Services division. Turnover here fell 1% to £101m (equivalent to 40% of group revenues), as the number of terminals receiving real-time Exchange data declined yet again. The LSE, however, claimed this area to be 'late cycle', compared with other group activities that benefit more quickly from a recovery in equity markets. A better performance was seen in Issuer Services, which saw turnover improve 7% to £39m (15% of group revenues). The uplift reflected increases to both flotation and annual listing tariffs. Sales within Broker Services were lifted 8% to £94m (38% of group revenues) following continued growth in the LSE's electronic order book. During the past year, the total number of equity bargains increased by 9% to a daily average of 234,000. The average daily figure going through the LSE's own (higher margin) SETS system surged 26% to 137,000.
Cash flow and balance sheet
Following a £15m pension prepayment in 2002/3, working capital was minimal in 2003/4. Capital expenditure, however, jumped to £52m, as the LSE kitted out its new City offices in Paternoster Square. The sale of the famous Exchange Tower was confirmed after the year-end, with proceeds of £67m expected to be collected. One accounting practice worth bearing in mind with the LSE's balance sheet is that certain software is capitalised as a fixed asset. Considerable expenditure in this area can be expected in the next few years, as the LSE embarks on the remaining stages of its 'Technology Roadmap', a venture that should cut ongoing IT costs by 20% by 2007/08. As at March 2003, software had an asset value of £25m. Something that needs no bookkeeping clarification is the LSE's cash hoard. During the year, another £12m was added, taking the company's net cash pile to £223m (or 75p per share). The cash-flow performance allowed the ordinary dividend to be lifted 12% to 4.8p per share. Calculating the LSE's incremental return on equity performance is a complex -- and largely academic -- task. Over the last few years, the LSE has transformed from a quasi-mutual to a public company, suffered numerous exceptional charges, discontinued its settlement and regulatory businesses, and experienced somewhat unprecedented IT costs to develop the SEQUENCE and CREST systems. On a traditional basis, using pre-exceptional 2004 earnings of £64m and a year-end equity base of £372m, the LSE's return on equity comes to a reasonably sound 17%. That calculation, plus the fact the LSE has a substantial (low return) cash pile, no debt, low working-capital requirements and fixed assets not directly related to the expansion of its business (i.e. mostly buildings and offices), suggests the LSE can reinvest its future profits at superior rates of return. After benefitting from the aforementioned £15m payment, the LSE company pension scheme carried a £12m FRS17 shortfall at the end of March. As before, around a quarter of the scheme consists of equities, and the trustees plan to move gradually to 100% bonds over the long term. Valuation and summary The year to March 2004 saw the LSE generate 19.9p of operational free cash. Adjust for the cash pile and, at 391p, the shares offer a historic free cash flow yield of 6.3%. Demanding 7.5% therefore requires an entry price of 341p. Assuming shareholders give the go-ahead, July will see the payment of a 55p-per-share special dividend, accompanied by a six-for-seven share consolidation. Account for the Tower sale, too, and 360p is needed for a 7.5% free cash flow yield post-capital re-organisation. (Beware, though, that both these valuations assume operating profits remain flat. In reality, the LSE could see net lease costs rise significantly if sublet space at its new offices remains empty.) In summary then, a passable set of figures. By far the most important aspect was the special dividend. Though boss Clara Furse is on record as saying the LSE's 'strategy for growth' includes 'acquisition opportunities', it would appear the plans for corporate activity have been scaled down somewhat. Indeed, with the sector ripe for consolidation, the release of cash may tempt a rival to make an offer. An old rumour linking the LSE with Deutsche Boerse was rekindled this week. Takeover aside, there's no sign of any mega LSE earnings growth on the horizon, although the launch of a Dutch share-trading service, the derivatives trading platform, covered warrants and the SEDOL Masterfile may provide additional revenues in the coming years. Nevertheless, shareholders can rest easy, knowing a sustained bull phase will re-occur at some point, which will inject new life into the LSE's earnings once again. Where next? Special Dividends | Danger: Acquisition In Progress | Buying Into Market Value. Maynard owns shares in the London Stock Exchange.
Year to March 31st
2000
2001
2002
2003
2004
Turnover (£m)
171.2
188.4
206.6
225.9
237.1
Operating profit (£m)
47.0
58.7
70.5
81.7
83.2
Exceptional items (£m)
(5.1)
(18.9)
(3.6)
(11.6)
-
Pre-tax profit (£m)
48.5
30.4
75.2
79.6
89.7
Earnings per share* (p)
-
15.2
18.3
20.9
21.3
Dividend per share (p)
-
3.2
3.6
4.3
4.8
Year to March 31st
2000
2001
2002
2003
2004
Operating profit (£m)
47.0
58.7
70.5
81.7
83.2
Change in working capital (£m)
(16.1)
(4.5)
(4.0)
(20.8)
1.1
Depreciation (£m)
22.2
19.9
17.5
19.0
21.9
Capital expenditure (£m)
(14.7)
(22.7)
(15.8)
(27.4)
(52.0)