Financial News

LONDON (ShareCast) - Shares in publishing firm Reed Elsevier (Amsterdam: 273044.AS - news) have underperformed the market by more than 30% since March and broker Citigroup (NYSE: C - news) believes that while the strength of the dollar may account for some of that underperformance, doubts about the new management may have also played their part.

Citi believes that Reed could announce a write down in the value of its data aggregation subsidiary ChoicePoint (NYSE: CPS - news) next month when it issues interim results. New chief executive Ian Smith may also take the opportunity to set out his strategic vision, which may ease investors' concerns about the direction of Reed.

"We believe the new chief executive will look at the structure of Reed and its competitive position vis-à-vis its closest peers. On the former, Reed has already committed to disposing of Reed Business Information and we believe it should sell exhibitions as well. On the latter, there is evidence that Reed is losing share; action here could be financed out of existing cost savings," Citi analyst Thomas Singlehurst writes.

Citi has kept its "hold" rating on the shares following the near 10% fall in the company's share price over the last month, but has cut its target price from 500p to 450p. The US broker is also chopping its 2010 earnings estimates by around 11%, prompted by foreign exchange issues and underlying deterioration in the group's business.

"Our 2010 forecast of 48.2p (flat on 2009) compares with consensus of 51.6p. Nevertheless the two scenarios we look at (sale of all B2B [business to business]; 100% reinvestment of cost saves) could take a further 20% off earnings per share," Citi said.

"If our scenarios come to pass, valuation may not be as attractive as it currently appears (around 12 times versus 9.6 times now), but nor would it be outrageous for a group of Reed's quality, especially given the improved growth/margin profile and capital structure," Citi concluded.