14 May 2013

ICAP released its 2012 results today. They were agreeably dull after a number of blows to the share price coming from stories about regulatory investigations including reports that it was being linked to the Libor scandal. At first sight, the statement from CEO Spencer suggests a pretty bad year: This has been an extraordinarily tough year in the wholesale financial markets. Trading activity across all asset classes was negatively affected by a combination of cyclical and structural factors including the depressed global economy, a low interest rate environment and lack of clarity around some aspects of regulatory reform. ICAP’s financial performance reflects these extremely challenging conditions. So how bad were the numbers? The answer is that compared to the mood of that statement (“extraordinarily tough year…..extremely challenging conditions”) they were delightful. Operating cash flow was down from 25% of revenues in 2011 to 24% i.e. it was high by the standards of most businesses. The dividend is maintained (for a yield of >7% at yesterday’s close) and after the payment of dividends, capex and restructuring charges, net debt fell by £100m (ICAP now has a net cash position). ICAP is treated by the stock market as if it is a cyclical business (and Michael Spencer does not seem to discourage this view) but its numbers say that it is practically a utility company. A conventional utility company also produces reliable operating cash flow but is burdened with much higher capex requirements. National Grid makes a somewhat higher operating cash flow margin (33%) but invests a formidable 25% of its revenues in capex. Centrica, which is highly regulated (and regularly grilled on the Today programme,) makes an operating cash flow margin of just 13% and will generally invest 5% of its revenues in capex. ICAP spends 3-4% of its revenues on capex but therefore retains much more of its 24% operating cash flow margin for other purposes (shareholders). Moreover, the ICAP capex is directed at electronic trading platforms which, other things being equal, continue to raise group operating margins. Every time I write about ICAP it is trading at around 327p though it has ranged from 280p to 355p this year. I am in the...