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...

10 Jan 2013

At first glance, ICAP looks like the kind of company that I don’t like to invest in. It is a financial service business whose employees are well rewarded for success. The normal problem with such companies is an implicit conflict of interest in that the shareholders find themselves in competition with the employees for a share of the added value. Shareholders of investment banks in recent years will be well acquainted with this idea. A key fact about ICAP is that the CEO is the largest shareholder and, understandably, he appears to like dividends. Michael Spencer owns 16.7% of the company. The dividend for last year paid him 108 million lots of 22p. That’s £23.8 million on top of his executive remuneration of £5.5 million. This man’s appetite for dosh is huge by most standards but he is greedy on behalf of all shareholders: and it helps to know that ICAP’s annual charity day has now raised a total of £100 million. ICAP is a large interdealer broker that matches professional buyers and sellers of all kinds of financial products (interest rate products, foreign exchange, bonds, commodities etc). It charges tiny commissions on huge transactional volumes. ICAP does not take positions. It is a pure broker that will know on a daily basis what its income is and what its costs are. Since the financial crisis hit, volumes have fallen and the company has been quick to cut costs. There are two ways in which costs are cut; first, by reducing headcount among the traditional broking staff; and secondly, by increasing the penetration of electronic trading (where profit margins are 40%). The increased use of electronic trading is a strategic goal that should improve underlying margins. ICAP is a business with strong cash generation. Operating cash flow over the financial year is typically 20% of revenues. This funds the dividends. The full year dividend over the five years of the financial crisis has risen from 15.65p per share to 22p. In the first half of the current financial year (to March 2013) it was raised again, despite Michael Spencer reporting that “this has been one of the toughest periods in my 36 year career...