More on ICAP
ICAP
Weaker markets and a strong pound were a drag on ICAP’s first half results. The world’s largest inter-dealer broker (a specialist service to banks and other financial institutions) saw turnover down almost 5% and operating profits were down nearly 4%. Overall levels of activity in all markets grew more slowly than last year, although there were signs of improvement after the summer.
The good news is the 35% increase in turnover in electronic broking to £39.9m. Although this represents only about 10% of total turnover it is a an area of growth (as it displaces telephone broking) and gross margins are healthy at 24% (up from 4% last year). Volumes reached US$46 trillion in Q3, up 63% on last year.
The bulk of ICAP’s income is earned in foreign currencies and the strength of the sterling has adversely affected reported earnings, although this has been compensated to an extent by cost reduction exercises. The stronger pound had a £28.9m adverse impact on turnover and reduced pre-tax profit by £5.8m.
The company is the dominant player (with 28% share of a fragmented market) and organic growth from increases in market share will be incremental. The company is entering new markets (including Korea, China and Latin America) and developing new products (eg. carbon emissions, coal contracts) which may prove to be useful drivers of growth in the long term.
ICAP is looking to reduce costs further; in the first half operating costs grew by only 2%. While this is welcome, it is not a driver of profit growth in anything other than the short run, which leads us to expect an aggressive approach to acquisitions (the company intends to increase its market share to around 35% through acquisitions), a strategy that is supported by the reasonably strong cashflows and low gearing.
<> The prospective PE of 13.9x is in line with the sector, despite a good possibility of further acquisitions that will boost growth. The yield is reasonable at 3.1%
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