London stands out within the shift to go non-public | USAEMALL.com

The UK’s financial services sector is one of the largest among developed nations in terms of the contribution it makes to national economic output.

Recent data shows that it contributes more than £200bn annually to the UK economy, coughs up £80bn in tax, or £110bn if you include linked professional services, and runs healthy trade surpluses with other nations, though the value of this overall has decreased in recent years, in part because of Brexit.

It plays a key role in driving economic growth and corporate success, as well as providing financial security for individuals. Investors can tap into this ecosystem through listed companies such as banks, pension providers, wealth managers, the London Stock Exchange, investing platforms and investment banks. 

But the reality is that momentum has been against one part of the sector — public markets. That’s true for almost all stock markets, but London stands out for its high number of delistings through take privates and takeovers.

British pensions funds, lacking any incentive to do otherwise, have deserted the domestic market, leaving companies vulnerable to acquisition. New listings have been in scant supply as companies stay private for longer or are swallowed up by bigger, often overseas, rivals.

Efforts are being made by policymakers to reverse these economically damaging trends but until the shift happens, whatever the trigger, brokerages and investment banks making their bread and butter from the markets will be under pressure.

Some have merged. Others are diversifying as Peel Hunt has done. It is itself a listed company, on London’s junior market Aim, and has been a steadfast and vocal champion of reforms to revitalise the UK’s public markets. In the meantime, it has diversified internationally and expanded its presence in a sector that remains a money-spinner — M&A.

BUY: AO World (AO.)

The online retailer needs to prove it can make its latest acquisition pay, writes Michael Fahy.

The acquisition of used electricals reseller musicMagpie provided a £30mn boost to AO World’s top line, with a 9 per cent increase in revenue to £1.14bn for full-year 2025, slightly ahead of forecasts. Like-for-like sales growth of 7 per cent was also praiseworthy, given the tough consumer environment.

Adjusted pre-tax profit grew by a third to £45mn, again nudging slightly higher than the guided range of £39mn-£44mn.

Although the musicMagpie deal added to the company’s top line, the business has continued to lose money, and AO World has spent almost £25mn in cash on the deal so far — £5.7mn of the £9.8mn purchase price, and the repayment of £19.1mn of assumed debt.

This, and an £11mn sum spent on buying back shares for use by the employee benefit trust to pay bonuses, contributed to a £13mn reduction in cash. Net debt rose from £30.8mn to £35.9mn.

MusicMagpie will continue to lose money this year. Analysts expect it to be a drag of about £3mn on profits, meaning that adjusted pre-tax profit would come in flat at the midpoint of the company’s guided range of £40mn-£50mn.

Chief financial officer Mark Higgins argued that once musicMagpie’s operations are properly integrated into AO’s website towards the end of the current financial year, it will bring much greater capability — offering buyers of a uniformly priced games console or mobile phone, for example, the opportunity to lower the cost by trading in an older model.

This isn’t a given, though, as the difference between AO’s adjusted and reported pre-tax profit numbers attest. A 40 per cent drop in the latter was due to a £15mn write-off of the carrying value of the Mobile Phones Direct business bought in 2018.

The market for selling bundled handsets and mobile contracts has proved increasingly tough. The company is seeking better terms from mobile networks and has indicated that it will exit this business if it doesn’t get them. It is currently broadening its mobile offering through handset-only deals on credit, and Sim-only contracts through a newly established virtual mobile network operation, AO Mobile.

The shares slid by 3 per cent on these results and are down 10 per cent over a 12-month period. There’s no dividend on offer and a price/earnings ratio of 16 doesn’t seem stunningly cheap. Yet AO’s strong reputation for customer service should stand it in good stead if, as many analysts expect, consumer sentiment brightens and discretionary big-ticket purchases improve from their current low volumes.

HOLD: Peel Hunt (PEEL)

Earnings remain in negative territory due to cost impacts, writes Mark Robinson.

As part of its corporate mission, Peel Hunt sets out to support mid-cap and growth companies. This objective has proved to be a little more challenging than usual given “geopolitical risks, elections, stagflation fears and US trade tariffs”. The Guernsey-based investment bank delivered negative earnings for full-year 2025, as rising restructuring costs and related share-based payments outweighed the increase in revenue.

Double-digit growth in execution services and research & distribution supported the top line despite the challenging market conditions. It is ironic that while a significant portion of the group’s investment banking deal fees were derived from M&A, it has also shed several clients for the same reason. That’s the industry in a nutshell as things stand. At least the representative market cap of the group’s clientele increased through the year.

Despite senior hires within its investment banking and European teams, the group has reduced overall staff numbers, down 3.6 per cent on average over the 12 months. Profitability was held in check due to the full cost impact of the Copenhagen office, which was set up in the prior year, along with that of the newly minted electronic trading desk. Management is intent on paring back non-staff costs where possible, “such as those from technology providers”, although this is easier said than done in the information age.

In keeping with wider trends, the group is seeing a rotation out of US assets into Europe and “greater institutional positivity towards the UK”, although the latter might be a short-run affair based on speculation that the UK chancellor is drawing up plans for a tax raid on dividends. The group’s enterprise value is equivalent to 1.1 times sales, suggesting that, at best, the market is ambivalent over prospects.

SELL: RWS Holdings (RWS)

A profit hit across the board has prompted an overhaul, writes Valeria Martinez.

RWS Holdings is looking to turn the page after a tough profit warning in April. New chief executive Ben Faes, a former Google executive who took over the Aim-traded language services specialist in January, has unveiled a fresh strategy to get organic growth and margins back on track after a sharp drop in profits in the first half. 

The group is shifting its focus towards artificial intelligence solutions and aiming to move to a recurring software as a service (SaaS) revenue model. Yet profits have taken a hit across the board, squeezed by heavy investment, pricing pressures and a changing sales mix. Adjusted pre-tax profits slumped 61 per cent to £18mn, while the margin fell 7.8 percentage points to 5.2 per cent. 

A significant portion of the profit slide, about £22mn, came from one-offs such as foreign exchange losses, higher amortisation, the sale of its patent search platform, Patbase, and more of its tech spend being counted as an expense. Underneath this, gross margins fell by 2.5 percentage points to 43.3 per cent. 

On a more positive note, organic revenue grew by a modest 1.4 per cent to £344mn on a constant currency basis, with three of the company’s four divisions contributing. The biggest unit, language services, saw healthy demand for its TrainAI data products, but the regulated industries arm was hit by softer demand in finance, legal and linguistic validation. 

RWS is now introducing a new set-up to make its offerings clearer and easier for customers to buy. It is reorganising into three core units aligned with different parts of the content lifecycle: “Generate” (AI and content tech), “Transform” (language services) and “Protect” (IP services). 

The group is also looking to break down regional sales silos to push cross-selling and adopt a “tech-first approach”, helped by the recent hire of a chief product and technology officer and the acquisition of dubbing technology intellectual property from Papercup. Efficiency gains through artificial intelligence and automation are also on the agenda.

Despite the lower profits and final dividend payout, net debt remains manageable at £27mn, helped by solid cash conversion. Still, the shares have halved over the past year as investors fret over the impact of AI on traditional translation services, leaving the stock trading at just 7.5 times FactSet forward earnings. 

The new strategy looks like a step in the right direction, but we will need to see the simplified operating model in action and the medium-term targets due in December before the investment case becomes clearer.