TP Icap for volatile times

TP Icap bought the hybrid voice broking and information business of Icap - now trading as Nex (NXG) - in exchange for newly issued shares equivalent to 56 per cent of the enlarged group, which were passed straight to Nex's shareholders. As part of the acquisition, TP Icap picked up interest rate and equity derivatives platforms that had made up the majority of the old Icap's revenue. The enlarged business does face challenges. Regulation is reducing the amount of capital its investment banking clients can use to trade, and cyclical pressures exist, caused by the negative impact on demand from low interest rates and compressed spreads, particularly in Europe.

However, TP Icap is beginning to benefit from both internal and external changes. Recently, it has been a beneficiary of the volatility following the US election and subsequent increase in interest rates there. While during the first six months of 2016 demand for traditional 'heritage' products such as interest rate derivatives, fixed-income and treasury products weighed on the performance of the core broking business, increased market activity following the election and the expectation of three further rate increases during 2017 meant sales of all products grew during the final three months of 2016. This is also good news because these types of broking products are typically higher margin.

In January management said 2016 sales will be 4 per cent ahead of 2015's £796m at constant currency and up 12 per cent in sterling terms. This was 6 per cent ahead of analyst consensus forecasts the day prior to the announcement. Several analysts have since upgraded their revenue and EPS forecasts for 2016 and 2017 (see chart). For example, analysts at Numis upgraded its EPS forecast for 2016 by 6 per cent, 7 per cent for the current financial year and 6 per cent for 2018.

TP Icap EPS upgrades

Following the Icap deal, TP Icap is highly concentrated in selling traditional broking products, where demand can be volatile. However, management is focused on growing the group by diversifying revenue. One strategic priority is expanding its information sales and risk management services business. This includes increasing business in Asia and the Americas, extending the level of data it provides to clients, and growing its sales team.

Energy and commodities is another business management is looking to expand, having acquired Moab Oil in July 2015. The group suffered a minor setback on this front when competition authorities forced it to divest its Europe, Middle East & Africa oil broking desks as a condition of last year's deal. More generally, though, management is on the look out for further bolt-ons to broaden its geographic exposure and product range.

At the time the Icap deal was announced management said it expected to find at least £60m in operational synergies across a range of areas, but there are grounds to hope it will do far better. For example, Numis forecasts £80m in savings during the medium term thanks to backoffice consolidation and falling broker compensation. TP Icap has also reduced costs in other areas, refinancing the banking facility it used to complete the deal. The group raised £500m in seven-year fixed rate notes with a 5.25 per cent coupon, which Numis estimates will reduce annual finance expenses by around £10m.