THE TIMES (UK): Tempus: Predictable Reed meets its target but still disappoints: “REED ELSEVIER could teach Royal Dutch/Shell a thing or two. Not only do the English and the Dutch get on just fine at Reed (largely because Sir Crispin Davis, Reed’s chief executive, tells everybody who is boss), but the media and information group is a byword for steady predictability — of the kind once personified by the oily folks at Shell.” (ShellNews.net) 3 Dec 04
By Nic Hopkins
December 03, 2004
REED ELSEVIER could teach Royal Dutch/Shell a thing or two. Not only do the English and the Dutch get on just fine at Reed (largely because Sir Crispin Davis, Reed’s chief executive, tells everybody who is boss), but the media and information group is a byword for steady predictability — of the kind once personified by the oily folks at Shell.
Reed has been promising all year that it would manage underlying earnings growth in the “mid to high single digits”, which translates to 7 to 8 per cent according to the sensible City analysts. But repeating the target failed to convince everybody that there would not be a sudden upgrade when the company issued its full-year trading update. Unfortunately, Reed did what it said it would do, and as a result the shares fell about 3 per cent as expectations were dashed. Oh dear.
Normally Reed does do a little better and yesterday it affirmed its plan to accelerate slightly next year. Some of its activities have been hit by one-off weaknesses — it has been a poor year for American schools, which has held back the Harcourt textbook arm, while its business-to-business publishing has also had a sticky year. Once again Reed is more optimistic, although the picture remains mixed.
Other problems, though, are more serious. The company’s market-leading Elsevier scientific publishing business is under pressure. There is growing criticism of the fees that it charges universities for access to scientific research, although the reality is that despite the excitement surrounding projects such as the free-to-access Google Scholar, only a handful of scientists are going to want to give their research away free. More worrying is the pressure on library budgets, which will act as a restraint on revenue growth in the future.
The other worry is the weak dollar. Reed generates half of its profits in the US. The position is hedged, but from a sterling perspective the movement this year means that earnings growth will be close to zero — meaning that the company’s hard work generates no real return for sterling investors. This is unfortunate, but the good news is that a $1.90 rate is now built into the company’s share price. At some point soon, Reed will comfortably outpace the dollar’s decline. Hold
De La Rue
LEO QUINN, who took over as chief executive of De La Rue in May, admitted yesterday that the world’s largest banknote printer had suffered “a chequered history” over the past five years. But he also sent a clear signal to shareholders that everything was now being done to maximise profits in a mature industry. To the relief of many, the company said that it would sell or close down its Sequoia Voting Systems, the US maker of touch-screen voting terminals used in the recent presidential election. De La Rue also announced 350 job cuts, which will cost £6 million but will yield annual savings of £8 million. The latest moves follow the closure of De La Rue’s Byfleet plant in Surrey last year.
These are clear signs that De La Rue is getting its house in order. It is focusing on its core strengths — banknote printing, banknote paper production and cash handling equipment — while cutting costs.
Mr Quinn has already taken strides in increasing De La Rue’s efficiency. It achieved operating margins of 6.5 per cent in the first half, compared with just under 5 per cent last time. Margins at its security paper and print division rose from 10.6 per cent to 12.4 per cent over the period.
Still, De La Rue’s markets offer little in the way of growth, while the company is valued at 14.1 times forecast earnings per share in 2005, higher than the average of 13.3 times among other support services companies. This premium is partially explained by a healthy 4.7 per cent prospective dividend yield, compared with the sector average of 3.4 per cent. The dividend could increase further in the future if a promised return of cash to shareholders materialises. But Mr Quinn said this would not happen until “the appropriate time”. Shareholders may be kept waiting if that return of capital is contingent on selling Sequoia, which made a first-half operating loss of £2.7 million and is expected to lose £5 million for the full year. De La Rue may be able to squeeze healthy profit growth in the future, but there is still much to prove and its high value in a mature market makes it one to avoid. Sell.
Xansa
THE British public sector has been a source of much nourishment for IT services vendors during a nasty downturn in the broader technology market. Xansa, which still bears scars from the slump, seems to have latched on to this trend later than some of its peers. Alistair Cox, the no-nonsense chief executive, tried to reassure investors yesterday that the worst was now behind Xansa by highlighting the growth potential in the public sector, driven by a government agenda that should provide a steady stream of contracts.
A return to interim profits put some flesh on the bones of Mr Cox’s rhetoric, as did the completion of an overhaul that saw loss-making units, most notably in North America, discarded. Xansa is also investing further into India, a low-cost market that is now home to a third of its employees. More staff will be hired there as it looks to expand its client roster beyond BT, mmO2 and MyTravel.
But there is still reason to be wary of Xansa. Mr Cox admits that the outlook for private sector deals, which continue to account for the bulk of group sales, remains “very modest”. In the UK, where Xansa’s focus now lies, the prospect of an election in the new year will delay the flow of new business. Xansa shares have had a strong run since the summer, rising from a low of 66p in July to 93½p yesterday. That values it at 16.1 times forecast
2005 earnings, in line with the sector average of 16.2 times. Despite the progress made, Xansa must show more growth to justify any further gains. Avoid.