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ICAP: Full year results
Against a backdrop faster growth in most markets, ICAP, the world’s largest voice and electronic interdealer broker, reported a 1% decline in turnover and a 5% increase in operating profits for the year to March 2005. Profits before tax, goodwill amortisation and exceptional items, rose to £178.9m (2004: £170.2m), ahead of market expectations, while operating profit margins increased to 21%.
Turnover declined in securities broking (down 12.1% to £324.6m) but was partly compensated by stronger performance elsewhere; electronic broking (up 35.2% to £83.8m) and energy broking (up 23% to £50.9m) performing particularly well. The growth in profits was driven by electronic broking(operating profits of £24m against £5.3m last year) and energy broking (operating profits of £7.6m against £5.2m last year.)
Profits from securities broking declined to £51.9m (2004: £66.5m) partly due to increasing volumes traded on the electronic platform and the weaker dollar. Rising interest rates depressed the corporate bond and mortgage markets, but the slack was partly taken up by US government bonds, issued to fund rising deficits. Average daily US Treasury volumes grew to US$567bn in the first quarter of 2005, up 13% on the previous quarter and 18% above the same period in the previous year.
The introduction of trading in credit default indices spurred electronic broking in the growing market for credit default derivatives.
Energy trading has benefited from the high price of oil. The company reports that the electricity, gas and oil related products markets have been very active in the past year, growing by an estimated 22% last year. ICAP says the long-term growth potential for energy broking remains attractive.
The company seems to have costs under control. A cost review exercise was undertaken in July last year has reportedly succeeded in eliminating £7m of costs this year. Underlying costs (excluding broker bonus costs) grew just 2% in the current year. The bulk of the company’s cost is broker remuneration (51% of turnover) but around 55% of this is variable. Overall, the company estimates that about 50% of total costs are variable, a factor that is a comfort in the event the markets turn.
The outlook for the markets is weaker, but the company’s dominant position the flexible cost structure means it is better placed to deal with a downturn that some of its rivals. The share trades at 275p, on a prospective PE of 14.5x which is not particularly cheap. The yield is 3.2%.
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