TP ICAP (LON:TCAP) - formed out of the 2015 merger of Tullett Prebon and ICAP's global hybrid voice broking and information business - says it’s: “the world’s largest interdealer broker” and “Tullett Prebon or ICAP is the number one or two interdealer broker in almost every product we trade”. Based on its corporate profile, the company faces some key risks:
Integration
The integration of TP and ICAP has generated cost savings, and is intended to increase the efficiency – which is likely to reduce costs further. Having already spent £130m it admits it has a lot more work to do before the target completion date of end 2019. TCAP‘s key to realising increased broking revenue (its biggest revenue source by far) is (via integration) aggregating liquidty of its products.
Political
A hard Brexit could mean a “loss of cross-border activities and “fragmentation of liquidity and reduced trading volumes.”
Regulation
TCAP is awaiting authorisation (no date confirmed) from France’s prudential regulator to enable it to conduct EU business within the EU.
Additionally, ICAP’s iron ore business suffered a steep decline in revenue due to the migration of liquidity from the OTC market onto exchange – illustrating the cost and risk of regulation.
Technology
TCAP is highly dependent on IT, and intends to use it to generate revenues, retain and attract clients and stay ahead of competitors (including new entrants and their new technologies).
“...over time this [expenditure on technology] will likely increase as a proportion of revenues.”
People
“ICAP broking revenue fell by 14% largely as a result of brokers moving to competitors in late 2017” and “higher amortisation [of costs] relating to initial contract payments made to brokers to secure their services against increased competition for their talent.”.
Markets
“2018 saw mixed market conditions with both Rates and Equities seeing strong growth of 5% and 18% respectively but with Credit down 11% and Energy & Commodities down 1%.”
Size and dominance helps, and so does TPI’s broad geographical reach, a broad and growing range of financial markets and clients, and it has a mine of valuable data.
Acquisitions
There is no guarantee further targets will appear - at the right price and fit.
Conclusion
For: TPI is generating free cashflow, is maintaining its total dividend of 16.85p for the year, has negative net debt, and a pension surplus.There is the potential for further cost savings and additional revenue, and underlying revenue is holding up and increasing in some markets. It is creative and not complacent.
Against: A £40m intangibles charge and a £65m goodwill impairment have dented EPS. In 2018, underlying profit before tax of £245m fell to an unimpressive £62m after deducting costs of integration, acquisitions, disposals, and exceptionals. (2017: £233m down to £72m). These are unlikely to be a continuing drag on earnings.
Overall: BUY
More from Dr Permjit Singh:
- Synairgen PLC: Admirable aim but financially off the mark, 26 June 2019
- Everyman Media Group PLC: Too risky for the return, 18 June 2019
- Central Asia Metals PLC: Solid performer but facing headwinds, 17 June 2019
Disclosure:
I have no positions in any of the securities referenced in the contribution
I do not use any non-public, material information in this contribution
To the best of my knowledge, the views expressed in this contribution comply with UK law
I agree with the terms and conditions of ReachX
This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.
Permjit S.