It’s just over a year since since TP Icap delighted its rivals with a profit warning and a spectacularly acrimonious boardroom bust-up in which its chief executive John Phizackerley was kicked out (Patrick Hosking writes). Since then, however, relative calm has returned to the interdealer broker, which earns its bread deep in the plumbing of financial markets — acting as matchmaker to investment banks wanting to make opposing bets and hedges in the arcane world of interest rates and currencies.
First-half figures yesterday showed underlying revenues and profits growing very modestly in relatively difficult market conditions. There were few market shocks in the first half to produce the volatility and surge in trading volumes that TP Icap loves. The US Federal Reserve was just too successful in telegraphing the shift in its interest rate thinking.
Revenues in the core global broking division fell by 4 per cent, or 6 per cent at constant exchange rates. TP was faced with a strong comparative performance in the previous year, but the number looks underwhelming. Its closest rival — the New York-based BGC Partners — managed a 6 per cent increase in brokerage revenues in the period.
Progress on fully integrating the two sides of the merger that created TP Icap — Tullett Prebon and the voice-broking division of Icap — is in line with the downgraded target of £75 million a year issued at the time of that profit warning. It was Mr Phizackerley’s overly optimistic claim that he could squeeze £100 million from the merger that led to his defenestration.
Interdealer broking isn’t quite the honeypot it was before the financial crisis. Investment banks are constrained from trading in the way they once did. TP Icap is resigned to stodgy growth in this business in the years ahead, warning shareholders to expect only modest, single-digit progress.
More exciting are the prospects for its three smaller divisions, being nurtured as part of a policy to diversify. The biggest of these is energy and commodities, where conditions in the power and gas markets are improving after a difficult 2018. The division is also bulking up through acquisitions and recruitments.
The other two divisions, data and analytics and institutional services, are aimed at widening the client base to include more hedge funds, sovereign wealth funds and market data vendors. Both produced impressive revenue growth of 19 per cent and 35 per cent, respectively.
Nico Breteau, 51, successor to Mr Phizackerley, 57, has high hopes for these divisions, though quite how he sees them developing he hasn’t said. A strategy review is due for completion early next year, but data and analytics alone could prove a hidden gem: the London Stock Exchange’s acquisition last week of Refinitiv put a tasty implied valuation on that business of 27 times earnings before interest and tax.
TP Icap looks to be on track for full-year earnings-per-share of about 30p and a total dividend of around 17p. That values the shares, which fell 2 per cent yesterday to 277p, on an undemanding multiple of 9.2 times and a generous prospective yield of more than 6 per cent.
There are dangers, of course. The company is at the mercy of the risk appetite of banks. It is also in an industry where the rewards in the good years stick to the staff, who don’t always share much of the pain in lean years. Despite the emphasis on variable pay, broker rewards fell by only by 1 per cent to £451 million in the first half, one sixth as much as the underlying slide in revenues.
Nevertheless, the shares still look relatively good value, given the positive performance and prospects in overlooked corners of the business.
Advice Buy
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Ted Baker
For a long time Ted Baker outfoxed the fashion market by styling itself as a sprawling global brand rather than a traditional bricks-and-mortar retailer (Ashley Armstrong writes). Its story and profits encouraged investors and its shares breached the £30 barrier as recently as March last year.
Since that time, however, they have been weighed down by controversy — taking a battering in December when Ray Kelvin, its founder, aka “the man closest to Ted”, was embroiled in a “forced hugging” scandal and misconduct allegations, which he denies — and profit warnings, blamed on heavy discounting and a weak American market. In June the company said that it was on course for underlying full-year pre-tax profits of between £50 million and £60 million, below analysts’ forecasts of £70.9 million.
Then last month Mr Kelvin — who opened Ted Baker’s first store in Glasgow in 1987 and turned it into an array of 201 UK shops, 359 overseas stores and lucrative wholesale and licensing businesses — was the surprising cause of a share price bounce. Rumours suggested that he could support a potential private equity takeover. Indeed, Ted Baker’s shares — flat yesterday at 900p — are almost 60 per cent lower than they were a year ago and the City reckons that makes the company ripe for a bid, arguing that it is trading below nine times earnings. Moreover, the number of public-to-private takeovers already this year are at levels not seen since before the recession, suggesting there is appetite for a leveraged deal. And Mr Kelvin owns 35 per cent stake in the retailer, making him a kingmaker in any potential bid.
Ted Baker is still hugely cash-generative, making £617.4 million last year, and has sizeable property assets, appealing to buyout firms. But investment bankers note that private equity houses are nervous about any potential “Me Too” backlash in a post-Harvey Weinstein age. So far Ted Baker has been silent on any approach, which suggests that a bid isn’t imminent, but it’s hard to find another big catalyst for a dramatic share price recovery as the retail environment worsens.
Advice Hold
Why Shares are already pricing in disappointment from profit warning but not full takeover benefits
