ICAP Plc Interim Update – 07 October 2014

Company Overview:

ICAP Plc is a global broking firm that operates across a range of markets including Currencies, Fixed Income, Derivatives (Swaps) and Shipping (Dry and Wet). The group is renowned today for its global reach and industry-leading EBS (Electronic Broking System) platform.

ICAP Plc offers both electronic as well as voice broking services from 70 offices, which are split across 32 countries. It also acts as a primary dealer on behalf of a number of the world’s major central banks, and, according to its website, forms an integral part of the global financial system.  

The group is also a leading innovator in  trading-related compliance systems and technology, fundamental requirements under today’s regulatory regimes across developed markets.

ICAP Plc was founded as Intercapital Plc in the 1980s by Michael Spencer, the former Tory treasurer and owner of City Index, who remains the Chief Executive today nearly three decades on.      

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The Stars Remain Aligned for ICAP Plc; Shares Begin to Recover

Since initiating coverage of ICAP in August, several risk events have led to rising volatility in financial markets. This has driven an uptick in trading volumes on ICAP’s broking systems, which has in turn prompted a recovery in the share price.

September’s volatility has seen the shares, after bottoming close to the 340.00 pence level, recover to reach highs of 402.00 pence shortly after the Scottish referendum on independence.

While this does not mean that the group is completely out of the woods yet, it bodes well for ICAP’s financial performance for the first half and in the quarters ahead. As a result, the group’s earnings multiple has expanded from 10.5 X 2013 (Aug) to 11.5 X 2013 EPS while the dividend yield has compressed slightly to come below the 6% level.

We believe that this reflects an increased level of optimism among investors over the outlook for the shares going forward. Consequently, we remain undeterred by the shift in valuation metrics and continue to hold a positive view of the group’s future prospects.

ICAP Plc Hourly Intervals

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ICAP’s Interim Update Yields Positive Noises from Management; Earnings Outlook Appears Set to Improve Further

ICAP’s financial performance as a brokerage is responsive to trading activity and volatility in financial markets. With two rate cuts from the ECB and a referendum on Scottish independence having taken place during recent months, electronic broking volumes via ICAP’s EBS platform have set new records while other forms of electronic and voice brokered order activity have also reached multiyear peaks.

This uptick in activity, we believe, validates our view that as we progress into 2015 and the proximity of potential interest rate increases in the UK and the US draw closer, trading volumes should continue to pick up. This is positive for ICAP and should continue to reinforce improving sentiment toward the shares.

This view was echoed in statements made by ICAP’s Chief Executive at the interim update:

“While I do not expect a linear recovery, this provides a basis to be guardedly optimistic about future market activity,” – Michael Spencer, CEO and Founder ICAP Plc

While the recent increase in order volumes is positive for performance in the second quarter, activity was lower over the course of the group’s first quarter and for this reason, overall revenues for H1 are likely to be lower than in H1 2013.

Nevertheless, with cost savings taken into account and continued double-digit growth in the Post Trade, Risk and Information Services division, we still expect underlying earnings for the same period to have remained steady with their 2013 levels.

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Summary

While we do not anticipate a “linear recovery” either, we remain optimistic when it comes to the 2014/15 earnings outlook for ICAP Plc. In addition to this, we also believe that investors will continue to recognise the potential for growth at ICAP and that this should lead toward a steady re-rating higher over the months ahead.

Consequently, we reiterate our existing price target of 415.00 pence for the shares, while we continue to see a firm cushion against any potential downside at the 340.00 pence level.

The next scheduled event of significance for the group is the release of half-year financial results on 19 November 2014. Accordingly, we shall review both the results as well as our price target for the shares at this time.

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