Volatility drives growth at TP ICAP

TP ICAP (TCAP) is another member of UK plc to have been targeted by activists this year. In March, Phase 2 Partners pushed for the sale of the interdealer broker after a “disastrous” share price decline (its shares are still down 30 per cent year on year). Shrinking profit margins and underperforming acquisitions attracted particular criticism.

The company’s half-year results suggest some of these problems are being addressed. The shares jumped by 10 per cent after the group reported a 15 per cent rise in half-year revenue. According to management, increased market volatility – including the war in Ukraine and tighter monetary policy – drove higher trading activity and volumes “across most asset classes”. This benefited TP ICAP’s global broking business, which generates more than half of group revenue.

The energy and commodities market proved trickier, with huge price swings in European gas and power reducing activity, as traders adopted a ‘risk off’ approach. However, revenue still grew by 2 per cent, driven by a strong performance in the US and Asia Pacific.

Ebit margins have also significantly improved, rising from 6.1 per cent in 2021 to 9.2 per cent, ahead of consensus estimates for the full year of 7 per cent. TP ICAP seems to be handling wage pressures well, reporting flat management and support costs. Admittedly, broker compensation rose by 11 per cent year on year, despite a5 per cent fall in headcount. However, productivity has increased by15 per cent, with each broker generating more revenue than before.

Margins may come under pressure as the year progresses, however. Analysts at Peel Hunt warned of inflationary challenges, and – despite a strong first half – management has left its full-year profit guidance unchanged. The group is confident it can make cost savings, though, saying its move from the UK to Jersey should free up £100mn of cash. It is “on track to achieve” £25mn of cost savings by the end of the year.

The success of TP ICAP’s acquisition strategy remains to be seen. Last year, the group bought trading firm Liquidnet for $700mn (£579mn) and the acquisition went on to report disappointing revenue growth. In the first half of this year, Liquidnet doubled its revenue, suggesting the situation is improving, but it is still early days.

Indeed, TP ICAP’s situation generally looks rosier. However, the group faces strong headwinds over the coming months, and trading conditions are volatile – not necessarily in a good way. Hold

Last IC View: Hold, 220p, 14 Oct 2020