Raising Our Price Target for ICAP Plc – 09 April 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.      

IndexFTSE 250TickerIAP.LLatest Close550.50
52 Week High560.0052 Week Low338.70P/E (F)20.90
Dividend Yield %4.0Dividend Cover1.2CEO:Michael Spencer
CFO:Iain TorrensPrevious Price Target415.00Current Price Target450.00


Earnings outlook for ICAP remains bright, while shares outperform the market several times over

At the time of our last update the earnings outlook for ICAP Plc was beginning to brighten and thereby supporting a strong recovery in the shares.

Behind this improving outlook were management’s expectations for cost savings to make a meaningful contribution to earnings in the second half, in addition to a growing potential for increased volatility in FX markets to drive volumes and commission income for the full year.

Furthermore, as the wave of ever increasing regulation in the sector continues to wash over financial firms, the market for post trade, risk and information services has also continued to blossom. If this trend continues as it is expected to, the above division will likely continue to increase its contribution to group earnings throughout the coming years.

It is with the aforementioned trends in mind that we have remained optimistic in our outlook for ICAP Plc, although we have also been reluctant to raise our price target for the shares during recent months given the rapid pace of gains made since the time at which we first initiated coverage.

While we do not regret this prudent decision, we note that improving market sentiment toward the group’s future earnings prospects has continued to propel the shares higher throughout the intervening period, bringing total returns since August 2014 to 60%.

This performance dwarfs even our own projection for initial upside of 20% over the near term (from August).

Therefore, it is with this in mind that we revisit the investment case for the group today before updating our outlook and price target for the shares ahead of the release of full year financial results on 19 May 2015.   

ICAP Plc Share Price / Daily Intervals



Monetary policy and economic conditions to continue driving growth in volatility and volumes across ICAP’s broking platforms

In the nine months to March 2015 fx market volatility and US treasury trading volumes have picked up noticeably.

Among other things, the extended bond buying program announced by the BOJ in November and the removal of the Swiss franc cap by the SNB have been two considerable sources of increased volatility in currency volumes during this time.

While the impact of the above events has already begun to fade, in terms of increased volumes, we still see scope for trading activity to remain at heightened levels during the quarters ahead and to potentially, even pick up further.

Looking ahead we expect the predominant driver of this heightened activity to be divergence of monetary policy, with interest rate movements from both the Federal Reserve and the Bank of England set to take centre stage in GBP and USD trading.

These events will also be positive for trading volumes in US treasury’s, which is another staple of ICAP’s revenue stream, as when rates rise and the Fed eventually begins to exit the market for US government bonds we should see a gradual return to earlier levels of volatility and trading activity.

The net effect of the above should be higher commission income generated by ICAP’s trading platforms, which when combined with what is still double digit revenue growth in post trade, risk and information services division; should be positive for earnings at the group level over the next 12 – 18 months.


The takeaway

In short, our outlook for ICAP Plc remains positive regardless of the time horizon.

This is because in the near to medium term the investment case for the group will draw support from an evolving monetary policy environment in the UK and the US, which is is positive for trading volumes and commissions.

Over the longer term, we see the above referenced investment case drawing more support from ICAP’s success in diversifying into the post trade, risk and information space; which should enable it to alleviate some of the competitive pressure it is experiencing in electronic broking.

Looking to the immediate future, and taking into account consensus projections for a reduction in earnings during 2014, the price to earnings valuation at ICAP is a modest concern. This is because at 20.9 X consensus EPS, the group now trades at roughly a 20% premium to the wider non-bank financial sector average (17X).

Given that there is a genuine risk of minor disappointment in the full year numbers in mid May, we are sceptical of ICAP’s ability to maintain this premium valuation over the near term. It is with this in mind that we caution against excessive optimism in the run up to results day.

Although, having said this, we also acknowledge that improved sentiment toward the shares and a likely improvement in earnings for 2015 both mean that our existing price target of 415.00 pence does not fully reflect the potential for the shares over medium term (2015).

For this reason we raise our price target today from 415.00 pence to 450.00 pence, which implies a 17X consensus eps multiple also corresponds closely with the 50% retracement off from the share’s March highs.  (August 2014 – March 2015 trend).

While we have already raised our price target for the shares today, we shall revisit ICAP at the time when it releases full year numbers for 2014 and accordingly, provide an overview and our own interpretation of group performance during the period.


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