Nex (NXG) has cut its profit expectations for the first half of its financial year, after accelerating its investment in its core post-trade risk and information business. The operating margin is expected to be around 20 per cent for the six months to the end of September – down from 29 per cent at the end of March, and still well adrift of the group target rate of 40 per cent by 2020.
Management is trying to better match its structure to the way clients use its services. That means reorganising the products and services offered by Nex Optimisation into six divisions: trade and portfolio management, analytics, regulatory reporting, financial resource optimisation, data insights and investment arm Nex Opportunities. The business accounted for 44 per cent of group sales last year and a third of operating profits.
Management is also trying to take advantage of an anticipated uptick in short-term demand for regulatory reporting services from clients ahead of the implementation of Mifid II in January. It therefore plans to plough more cash into marketing and sales initiatives around the reporting services offered by Abide Financial.
Lower market volatility has also impacted the sales of risk mitigation product Reset, contributing towards the decline in operating margins during the first half. However, following a review of Nex Optimisation’s corporate functions, management said it had identified cost savings above the £25m announced at the time of its full-year results in May. While management expects margins to normalise during the second half of the financial year, a reduction in full-year profitability still seems likely.
Shore Capital analyst Paul McGinnis estimates that even if the division's margins do return to the same level as last year, they would be likely to settle around the mid-20s for the year ending March 2018. Given the probable drag on group profits, he has downgraded his 2018 forecasts for adjusted earnings per share (EPS) by 15 per cent, and made cuts of 5 per cent for 2019 and 2020. During the past 12 months, Bloomberg's consensus forecast for 2018 EPS has been cut by 43 per cent to 29.5p a share.
