Exel carries too many questions

Exel; Waste Recycling; Royalblue

Things are looking grim at Exel, the freight and logistics group created from the merger of NFC and Ocean in 1999.

As technology spending has collapsed, Exel is shipping less around the globe for New Economy companies. The car industry is also weak, and forecasts for global growth are still being revised downwards.

Exel was able to characterise results yesterday as a resilient performance in the face of challenging markets. It secured new contracts worth £310m a year, in line with forecasts, and said it saw no reason to reduce its guidance for the full year. It believes its global scale and technological advantage over its rivals will be a cushion in the second half. But pre-tax profits for the six months to June, before goodwill and exceptionals, were down 2.5 per cent to £88.6m. Stripping out currency fluctuations and cost savings from the merger, the picture is even worse.

The US results were flattered by the performance of an acquisition, the motor industry logistics firm FX Coughlin, which analysts had underestimated. The shares jumped 61p to 749p on hopes for a US recovery that hardly seem justified by the figures. Although the outlook for the technology companies Exel services has stabilised, the recent reporting season in the US has shown little in the way of a rebound.

It is difficult to tell just how bad is bad, though. Analysts are frustrated by a lack of clarity in Exel's results, which are split out only along broad geographical lines. That makes it tough to work out the true state of the air freight business, where most of the concern currently lies. The statement was peppered with disappointments in individual markets, too, raising questions over management's grip on the sprawling empire it has created.

So far this year, Exel shares have been used as a play on the US economy, and the prevailing pessimism has taken them to record lows. It is far from clear that there will be a corresponding upswing with a resumption of accelerating US growth because, on a forward prive-earnings multiple of about 21, the stock still looks expensive. Sell.

Waste Recycling

Where there's muck, there's brass – and Waste Recycling made £20.2m in the six months to June by transporting, dumping, burning, or otherwise treating rubbish.

The group, which has been the UK's biggest landfill company since it bought Hanson's waste management business for £185m at the turn of the year, makes its money mainly from safe, long-term contracts with local authorities.

Don't bet on yesterday's £14m acquisition – of Integrated Waste Management in Yorkshire – being the last, as Waste Recycling surprised analysts with strong cashflow that can be used for more expansion.

The business is being driven by European Union directives on the treatment of waste and new UK government targets which aim to see 25 per cent of rubbish being reused by 2005. Waste Recycling currently handles 10 million tonnes of refuse a year, and is set to carry on producing double digit earnings growth.

It is also producing gas. There should be news in the autumn of a new strategy to wring more profit out of its energy division, which generates power from the gas given off by the decomposing contents of a landfill site. Currently, this business accounts for 5 per cent of turnover and 20 per cent of profits, but there are plans to double output in five years.

A disappointing first quarter, when wet weather added to the costs of treating discharges from its sites, meant market forecasts could not be raised after yesterday's interims, but ING Charterhouse is still predicting a £43.5m profit for the full year. Up 12.5p to 423.5p, the stock is on a prospective p/e of 18 times. Buy.

Royalblue

Royalblue IS a software group focusing on the investment banking industry, possibly the riskiest niche to be in given the current economic and market climate. Little wonder its shares have been languishing at 18-month lows. The market has long feared that IT spending will be cut as savagely as staffing levels while the boom-bloated investment banks adjust to the bursting of the internet bubble.

Royalblue claims its Fidessa trading software, which aims to cut investment banks' cross-border dealing costs, can look even more attractive in lousy markets. Interims yesterday certainly disappointed the bears. Fidessa ales were up 68 per cent to £25.2m, operating profit more than doubled to £3.2m. News of a healthy order book for the second half sent the shares up 40p to 740p.

The group should have little difficulty hitting forecasts of £7.6m profit this year, but it is new orders in the second half that will determine its medium-term fate. With the shares on 30 times 2002 earnings, it is still too pricey while the risks remain so heavily on the downside.