Shares in Nex Group, the old Icap inter-dealer broker, had risen by almost a quarter since this column tipped them at the start of the year as one of the 2017 tips before yesterday’s abrupt fall on some strong-looking third-quarter figures. Nex is now shorn of its voice broking business, sold to TP Icap, which is what its rival Tullett Prebon calls itself; the company still gets most of its revenues allowing financial institutions to buy and sell interest rate and currency derivatives on its two electronic platforms.
Because of its growing post-trade business offering information and other services, though, it prefers to see itself as a financial technology company, which would attract a higher stock market rating — indeed, that prospect was one reason for the recommendation.
The third-quarter figures showed the effects of the “Trump bump” and of the lower pound — perhaps three quarters of its revenues are in dollars. Daily dealings on the BrokerTec platform, which offers interest-rate derivatives, were at their second highest on record just after the US election, while there was heightened interest in dollar/yen trading on the other platform, EBS.
The Trump victory meant greater uncertainty, which drives business to those platforms, after some years of low interest rates and stagnant currencies that had seen volumes collapsing at the inter-dealer brokers, contributing to the need to do the Tullett-Icap deal.
The shares lost 23p to 551½p. There are several reasons. The Trump boom has not continued into this year and may not be that long lived, as Nex itself concedes.
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The translational benefit from the lower pound on revenues and earnings will drop out in the summer, just three months into the next financial year. There is a warning that the need to invest in post-trade activities, now renamed Nex Optimisation, will hit margins there. Indeed, these fell from 33 per cent to 28 per cent year-on-year in the first half.
Given all the above, there was no surprise that the market chose to take profits, especially since visibility of earnings for the reshaped Nex is not that clear yet. Readers who took this column’s advice to buy at the start of the year might consider taking profits too.
My advice Sell
Why Some see Nex as a takeover candidate but this is far from certain and investors should think about locking in some profits
Shanks Group
Mergers should work when both parties enter into them at the bottom end of the cycle and if there are sufficient savings and efficiencies to enable the recovery to take place faster than otherwise.
The deal for Shanks, the waste management business, to acquire Van Gansewinkel Groep (VGG) of the Netherlands, which has just crossed its final regulatory hurdle, seems an example of this.
The two are both in the top three of the waste market in the Netherlands. Shanks shares, up 2¾p at 96p, have recovered from about 60p a year ago. The trading update earlier this month indicates that while the Benelux activities are doing well enough, there are still problems with municipal contracts in the UK, given the low prices for the recycled materials their waste management plants there produce.
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The purchase of VGG from two private equity firms was much delayed while Shanks waited for the price to correct to what it saw as reasonable. The company is being acquired for €493 million, or a bit less than six times earnings; the latest trading update saw these ahead by 23 per cent. The deal is strictly speaking a reverse takeover of Shanks because its target is the larger company. The vendors will end up with 24 per cent of the company. Shanks has indicated cost savings of €40 million, though these will take a while to come through. No meaningful multiple can be applied to the shares, but the cost savings make the deal look an attractive one.
My advice Buy
Why Hard to value at this stage but growth is there
Qinetiq
The third-quarter trading update from Qinetiq is a bit light on detail for what was such a significant period for the defence group spun out of the Ministry of Defence, still its biggest client, in 2002. The company last featured here for the purchase of the target systems business of Meggitt.
Of more importance was probably the amendment in early December of its contract to run testing ranges for the MoD. This accounts for about £300 million of total revenues in the latest financial year of £756 million; Qinetiq will now have to invest £180 million on the ranges, to be reimbursed, in return for a £1 billion increase in MoD payments. The investment should attract customers who use their counterparts overseas.
The update indicates that trading at this core business is at the same level as before while margins are holding up, despite pressure on them from the UK defence regulator. North America is recovering from a long-term decline in orders for robotics after US forces withdrew from Iraq and Afghanistion, which is also encouraging. The shares, up ¾p at 277p, sell on 17 times earnings. Still a long-term hold.
My advice Buy
Why The shares continue to look good value
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And finally...
Though there have been a couple of Gulf states’ healthcare companies quoted in London, Georgia Healthcare Group, in the Caucasus nation, is a one-off. It was floated in late 2015 by the majority shareholder Bank of Georgia, the attraction being that private healthcare is growing in the former Soviet state, albeit from a low base. Currency swings and interest rates will always be uncertainties but the company raised earnings last year by 39 per cent and in May bought GPC, a retail and wholesale pharmacy.