The FTSE 100 index climbed higher for a third consecutive session on Wednesday but interdealer broker ICAP shunned the rising trend to fall almost 2% lower to become the blue-chip index’s main casualty in morning deals.
At 9.30am, ICAP shares had shed 7.5p to 435.5p, underperforming the broader index, which ticked up 34.6 points or 0.8% to 4,272.3.
The interdealer broker this morning issued a trading update for the three months to end-June in which it said first quarter revenues are up 10% year-on-year, it remains on track to achieve cost savings of £23 million in the fiscal year 2010 and it expects to post full-year adjusted pretax profits in line with current consensus forecasts.
Though these statements met with analyst approval, the consensus seems to be that the stock is valued too highly given that margins are likely to come under pressure in the near term and regulatory changes in the pipeline provide for uncertainty.
Analysts Justin Bates and Tom Mills at Daniel Stewart wrote in a note to investors following the update: “This is a commendable performance against difficult comparatives and is stronger than we had expected.” However, the broker repeated its Sell recommendation and 340p price target on the ICAP stock, highlighting not only that full-year profits in line with consensus implies a 2%-3% year-on-year decline, but also that it expects margins to come under pressure and sees near-term headwinds in the form of falling e-broking volumes, further deleveraging of financial institutions and contraction of the investment banking and hedge fund industries.
Regarding regulatory changes, Daniel Stewart noted that ICAP has reiterated its support for the EU and US proposals to increase transparency and reduce systemic risk. The broker believes the London-listed company is “far better placed” than its interdealer broker peers to deal with the proposed regulatory changes, although the structure of the new system is as yet undecided.
Panmure Gordon’s Vivek Raja is a tad more concerned about the market overhaul. “We have concerns over certain parts of the regulatory agenda, which we expect will increase wholesale trading costs and ICAP’s pricing pressures: position limits, increased capital requirements, additional red tape/compliance burden.”
Headline first quarter revenue growth of 10% is better than Raja’s 7% forecast and as such the analyst is nudging up his 2010 earnings forecast by 1.5% to reflect this as well as the benefit of cost savings.
However, arguing that ICAP’s Voice broking business, which accounted for more than half the group’s 2009 earnings, is likely to face tough volatility comparables, in addition to regulatory risks and increasing pricing pressures, Panmure sees the stock’s current valuation as too full and has therefore stuck with its Sell advice and 350p target price.
At Numis Securities, analyst James Hamilton is also cautious. “Short term we would urge caution and take profits with the stock up 110% from the lows this year,” he wrote in a morning research note, in which the broker reduced its full-year adjusted pretax profit forecast to £336 million from £355 million previously and cut its price target to 391p from 425p.
“Long term we continue to believe ICAP is well placed to gain market share in a growth industry,” Numis reassured, but in the mean time the broker told investors: “Your time horizon dictates if you Buy or Sell; we have moved our recommendation to Reduce [from Hold].”
