More on ICAP
ICAP: 2006 results
ICAP, the world’s largest interdealer broker reported that pre-tax profit (before amortisations, exceptionals and impairment of intangibles) rose 16% (to £193m) in the year to March 2006.
Strong revenue growth, coupled with tight cost control were responsible this years growth. Group revenue rose by 13% to £919.2m with electronic broking revenue increasing by 17%. Operating margins were maintained at 21%, and underlying cost growth (excluding broker bonuses, the impact of acquisitions and currency fluctuations) was restricted to 4%.
The company has benefited from strong markets (trading volumes tend to be much higher when markets are on an upswing) ands also by volatility in commodities, interest and exchange rates, which prompt people to use instruments to hedge against risks.
Growth next year will be boosted by the acquisition of the EBS Group (in April 2006). According ICAP, EBS is the “pre-eminent provider of foreign exchange trading and market data solutions to the professional spot foreign exchange community”
The company expects that continued macro-economic imbalances in currencies, interest rate and credit markets (leading to price volatility) will lead to increased underlying demand for certain instruments including interest rate and credit derivatives, FX, energy and listed futures markets.
The company’s strength has been its electronic dealing platform which allows efficient trading coupled with voice broking which has helped maintain relationships with clients.
The threat to the company will come from rival brokers or entrants who offer similar products, which is why the company is aggressively pursuing a strategy of acquiring related businesses and squeezing costs by integrating them with its own systems. The strategy is sensible and its execution so far has been successful, although its latest acquisition looks rather expensive.
ICAP is the global leader in inter dealer broking market with an overall market share estimated at between 28-29%, slightly above last year. The acquisition of EBS will “more than double” ICAP’s annual electronic broking revenue, and more importantly, will give it a stronger position in the fast growing electronic market.
Although EBS is big in electronic broking, it is only a tenth of ICAP’s size in terms of total turnover. In 2005, EBS’s revenue was £114m (up10% on 2004) and operating profit (before exceptional items and goodwill) was £20m. ICAP paid $517m and 36.1m new ICAP shares for the acquisition, which was far from cheap although it does make strategic sense.
Overall prospects look good, but should the recent slowdown in the equity markets turn into a slump volumes may be adversely affected.
The share trades at 465.23p, on a prospective PE (2007 earnings) of 16.8x, at the upper end of the sector range with a yield of 2.5%.
Random picks: Allied Domecq | BSkyB | Countrywide | Great Portland Estates | Johnson Matthey | Northumbrian Water | Rolls Royce | Skyepharma | Anglo American | Scottish & Newcastle