Financial services firms, such as securities traders, building societies and banks, are currently seeing activity levels dropping at their fastest clip since the March 1991 recession, according to a recent survey by the CBI and accountants PricewaterhouseCoopers. Worryingly, it looks like job creation is set to stall in the year ahead. What does this mean? It’s not good for many City institutions and recruiters, but at least their share prices have adjusted to lower profit expectations.
BPP Holdings (BPP), rated a BUY by The Times
Financial services firms, such as securities traders, building societies and banks, are currently seeing activity levels dropping at their fastest clip since the March 1991 recession, according to a recent survey by the CBI and accountants PricewaterhouseCoopers. Worryingly, it looks like job creation is set to stall in the year ahead. What does this mean? It’s not good for many City institutions and recruiters, but at least their share prices have adjusted to lower profit expectations.
However, these same concerns are yet to hit BPP Holdings, Europe’s leading provider of professional education. Every year it trains thousands of accountants, lawyers, and MBA students. Over the past five years the firm has benefited from City demand for newly qualified staff, amid the mergers and acquisitions boom, the introduction of stricter corporate governance rules (eg, Sarbanes-Oxley) and the transition to International Reporting Standards from UK GAAP (Generally Accepted Accounting Principles). Yet these three dominant themes are now ending. As demand for fresh accountants and lawyers wanes, the numbers of students being trained by BPP will be affected.
In defence, the bulls argue that BPP’s fortunes were transformed last year when it became the first private-sector company in Britain to be granted degree-awarding powers after three years of scrutiny by education regulators. Sure, this could be a huge new sector for BPP – estimated to be worth £800m a year – but the opportunity is still in its infancy. Its first postgraduate courses will only be up and running for the start of the new academic year in September.
In the near term, BPP’s earnings still depend largely on the health, or otherwise, of financial services. Given the bleak outlook for the industry, I would put the shares, at best, on a 2008 p/e multiple of 12 – roughly 400p a share. That makes the stock look vulnerable to a sharp dip at present levels, particularly since at the last count in June BPP was laden with a £53m of net debt.
There is always a chance it will be bought by an aggressive predator – the board rejected an offer of 725p a share last March from Carter & Carter. But the climate for leveraged deals currently looks dire, so I suspect this outcome is remote.
Finally, while BPP’s 2007 results should meet City hopes because they are further down the food-chain, I think that in 2008 there is every chance of downgrades and profit warnings. With the economy turning, now is the time to bale out of this cyclical stock. A pre-close trading statement is due out shortly.
Recommendation: TAKE PROFITS at 594p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments