ICAP Plc Quick Note, Raising Our Price Target Again – 20 May 2015

Company Overview:

ICAP Plc is a global broking firm, which 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 that are fundamental requirements under today’s regulatory regimes across developed markets.

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

Index FTSE 250 Ticker IAP.L Latest Close 565.00
52 Week High 573.00 52 Week Low 338.70 P/E (F) 18.6
Dividend Yield % 3.92 Dividend Cover 1.3 CEO: Michael Spencer
CFO: Iain Torrens Previous Price Target 450.00 Current Price Target 520.00


ICAP surprised on the upside with 2014 results

ICAP shares have remained buoyant since the time of our last update as market expectations remained firm going into the release of full year results, where the group topped consensus estimates for revenue, profits and earnings per share.

In detail, trading EPS was down by 14% to 28.7 pence for the period and basic EPS at the group level was down by 17% to just 13 pence, although both of these figures are marginally ahead of where consensus estimates had suggested they would be.

ICAP also held its dividend steady at 22.00 pence per share for the full year, although cover on the dividend is now down to just 1.3X which suggests that if performance does not pick up soon then it is possible that we will see the danger of a dividend cut increase.

So far the market appears to have responded positively to the update, with the shares holding their ground above the 540.00 pence level in post – release trading.

Below we provide a brief overview of the group’s performance in terms of some core KPI’s, which should be taken as a complement to our earlier report titled: Raising Our Price Target for ICAP Plc – 09 April 2015.

ICAP Plc Share Price / Daily Intervals



Balance sheet

Debt / Equity is now at 0.5X after debt fell by £259 million during the period, which leaves gearing now sitting at just 27%.

Both of these measures are within the bounds of what can be considered as acceptable and after taking into account management’s ongoing drive to reduce leverage, we are unconcerned about the current state of the balance sheet.


Cash flow

ICAP consumed more cash than it generated during the 2014 year (-£253 million) although much of this decrease in cash and cash equivalents was due to management’s focus on paying down debt, while the remainder arose as a result of dividend payments for the period.

This means that the business was sustained in part by its reserves during 2014 which under certain circumstances, could be a cause for concern. However, we are unperturbed by ICAP’s consumption of cash at present.

This is because if the current rate of debt repayment is sustained then the group will be completely unleveraged within two years, which means it can also afford to reduce the rate of repayment and still reach and unleveraged state within the next 4-5 years if such a move became a necessity.  

Furthermore, management anticipate an additional £35 million boost to free cash in 2015 which will come via the full annual impact of its cost reduction program, while consensus estimates already suggest a moderate rebound in earnings for the full year as well (+5.5%).

On balance and in summary, we view ICAP as a highly cash generative company given its adherence to the traditional broking model, which means that the trade receivables cycle is in most cases very short.

This is while when it comes down to the wire, we believe the current low level of gearing at the group level will lead management to hold a stable dividend as having priority over rapid debt repayment, which means that the adverse implications to shareholders of excessive cash consumption are minimal at present.



ICAP Plc held its dividend steady at 22.00 pence per share for the fourth year running in May. While this denotes a distinct lack of growth, with cover having fallen to 1.3X, shareholders are probably more concerned about the prospects for a dividend cut than any form of immediate growth.

Looking ahead we view it as more likely that the dividend will be held steady at 22.00 pence than it is that it would be reduced further.

In deriving this assumption we note that earnings are expected to grow from 2015 onwards, aided by the impact of a group cost reduction program along with better market conditions, which means that the rate of cover should also begin to improve from here onwards.

Furthermore, and as referenced above, ICAP is a highly cash generative company and when it comes down to the wire; we believe that the current low level of gearing will lead management to hold a stable dividend as having priority over further debt repayment.

For these reasons we view the outlook for the dividend as being relatively stable.



At the present time we are relatively neutral when it comes to ICAP’s valuation. This is because on a relative basis, both forward (18.6) and historical (19.7) earnings multiples show ICAP as trading at a notable premium to the financial sector average of 17X.

This is while the group’s historical multiple is close to the 20.9 X valuation average of the sector’s more prosperous constituents.

While ICAP’s medium term growth prospects could be said to warrant a premium valuation we believe that there are too many uncertainties over both markets and the group’s likely earnings performance in 2015 for us to feel comfortable in firmly declaring the group as either under or overvalued.

However, in light of a strong sector performance during recent months, a better than expected full year result for the group and a market consensus that suggests EPS growth of roughly 5% for the current year, we have revised our price target for the shares higher today in order to reflect these developments.  


The takeaway

In short, ICAP has made much progress throughout the 2014 year with both debt and its operational costs reducing, while most of the group’s broking platforms have experienced an upturn in trading volumes due to recent increases in market volatility.

However, we remain sceptical as to whether the shares will be able to hold their ground at current levels throughout the remainder of the year as there are still significant uncertainties surrounding future earnings while at current prices, the group is already valued at a premium to the financial sector.  

Although we have raised our price target for ICAP today, from 450.00 pence to 520.00 pence, we reiterate our belief that the shares will probably remain vulnerable to bouts of moderate weakness until there is further clarity surrounding the group’s performance in 2015.

Nevertheless, and to conclude on a brighter note, if management can convince the market that both cost savings and the ongoing growth in post trade, risk & information will mean that the group is able to reverse its earnings decline and meet expectations for growth in 2015, then the aforementioned weakness in the shares should be both minor and short lived.

Our revised price target (520.00 pence) for ICAP Plc implies an multiple of 17.4X consensus estimates for EPS in 2015 and corresponds closely with the 23.6% retracement level of the August 2014 to May 2015 trend.

The next scheduled event of note for ICAP Plc will be the Q1 trading update on 15 July 2015. As always, we shall endeavour to update all of our members with developments as and when they occur, as well as at the time of release on 15 July.



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