Charles Stanley in the race to buy broking’s minnows

The pick-up in share markets and private investor confidence is responsible for the growing attraction of small brokers. Valuations have perked up enough to persuade vendors to sell, but not gone so far that buyers are wary of buying.

The small punter is making a comeback. The Footsie’s push through the 5,000 mark is just the news that will set clients thinking about share investment again. So will the moribund housing market.

Corporate deals are also helping small brokers. It takes only a couple of extra company floats or trade deals each year to make a small corporate advisory division extremely profitable. Brokers with heavy fixed overheads are highly operationally geared to a recovery in stock markets.

Then there are the synergies from buying up rivals. A lot of duplicated costs can be cut out in areas such as finance, personnel and compliance.

And finally — much harder to achieve in practice, but always flagged up by such mergers — there is the chance to cross-sell one another’s services, from tax planning to pensions expertise.

For as long as the share market continues to make good progress, Charles Stanley should prosper. But with a large family stake controlling the business, it will be predator rather than prey. And at 21 times forecast earnings, the shares — which were unchanged yesterday at 332½p — are already fully priced. Hold.

Royalblue Group

ANOTHER industrial sector highly geared to the fortunes of the overall stock market is computer software for equities traders. Royalblue Group is enjoying the fruits of that relationship.

Its shares put on 34p to 480p yesterday as it reported an 8 per cent rise in last year’s pre-tax profits to £9.9 million and made bullish noises about the prospects for this year and next.

Most of the biggest investment banks in the City buy royalblue software, which is used for trading shares and some backoffice functions. Smaller banks and brokers also use the software through an outsourced service.

Recurring revenues from those clients locked into long-term licensing or servicing relationships grew by 27 per cent to £37 million and now account for almost two-thirds of all revenues.

The more lumpy and less reliable consultancy arm saw falling revenues, but appears on the mend with second-half income up on the first half.

Even after returning £8 million to shareholders last year through a special dividend, the business continues to churn out cash, boasting a cash balance of £25 million at the year-end.

This is a good company with a strong niche in the UK. It is taking on the Americans and winning. It recently clinched a deal to supply one of Wall Street’s biggest banks.

But the growth prospects do not justify the steep share price. The shares trade on a multiple of 23 times 2005 expected profits and yield less than 2 per cent.

The flurry of extra investment in new products and markets announced yesterday may or may not produce tomorrow’s winners, but it will certainly dent margins in the near term. This is a company still facing risks — both internal and external.

The shares have been boosted by hopes of a bid from a rival such as Reuters or SunGard of the US. Perhaps the £26 high reached at the height of the techie mania in 2000 is still in investors’ minds. It adds up to a useful selling opportunity.

BAA

MOST of us think of BAA as the operator of airports such as Heathrow, Gatwick and Stansted. The FTSE 100 company, however, has a different view of itself and yesterday set out to prove its prowess as a property player.

BAA’s decision to sell an £801 million parcel of non-airport property assets (mainly cargo warehouses, hotels and office space on the periphery of its airports) was met with a degree of shoulder-shrugging in the City. “The earth did not move for me,” one analyst quipped. Investors concurred, and BAA’s shares firmed a mere 3½p to 636p. However, the deal deserves closer attention for two reasons.

First, BAA receives £575.5 million in cash. The proceeds will strengthen BAA’s balance sheet at a time when it is about to start raising billions for Terminal Five and for a refurbishment of Terminal One. The inflow of cash should at the very least delay the need for another £500 million bond issue. For a company that expects total debt to hit £6.2 billion by 2008-09, half a billion in cash now is not going to make a huge difference to interest repayments. But every little bit helps.

Secondly, BAA reduces its exposure to property after several years of spectacular asset price growth. Only time will tell how good its timing has been, but it seems a reasonable moment to make a partial exit. BAA ends up with a half-stake in the newly created joint venture with Morley. The deal looks reasonable, but it does not justify buying more BAA shares. Existing shareholders should stay put.