ICAP hit by uncertainty over level of profit growth

30 Sep, 2008

ICAP, the world's No 1 interdealer broker, expects to grow profits this financial year, but said it was unable to be more specific because of current market turmoil, hammering its shares to a three-year low.
ICAP, which offers voice and electronic broking to a range of financial and commodities markets, had said in July that profit before tax, goodwill and one-off items for the year to March 2009 would be broadly in line with analysts' average forecast of about 375 million pounds ($689 million).
"Current conditions make forecasting market activity during the balance of the year much more difficult than usual," the British firm said in a trading update on Monday, ahead of first-half results on November 18. It said underlying profit was likely to be ahead of the 330 million pounds posted for the year ended March 2008 and that "if market developments and exchange rates are favourable, then the increase in profit could be well ahead of this figure".
Daniel Stewart analyst Tom Mills said the uncertainty raised question marks. "Maybe all this consolidation in the banking world is not going to do them any favours? Possibly people may have to downgrade forecasts slightly," he said.
ICAP shares fell as much as 21 percent to a three year low of 300 pence. At 1055 GMT, they were down 19.2 percent at 305.75 pence, lagging a 3.3 percent fall on the UK's benchmark FTSE-100 index and valuing the firm at about 2 billion pounds.
Chief Operating Officer Mark Yallop said ICAP was coping well with unprecedented financial market turmoil, with higher than average levels of volatility offsetting adverse effects. "The business has held up extraordinarily well during the last six months, when nine significant firms who have been customers of ours have experienced significant difficulty," he told reporters on a conference call.
"Some of them have gone into liquidation and others are in the middle of processes to be acquired by other firms - all of which you might expect to cause a reduction in activity. In fact the opposite seems to be the case." ICAP, which is 21 percent-owned by Chief Executive Michael Spencer, said revenues in the six months to September 30 were expected to be 20 percent ahead of the same period last week. Electronic broking revenues were particularly strong, especially in foreign exchange, and interest rate derivatives and US Treasury markets had also been robust.
Credit markets and mortgage-backed securities markets, however, had been subdued, it said. Some analysts were concerned about how financial markets might emerge from the current turbulence. "We see a period of subdued trading where fear rules greed and revenues for ICAP are impacted," said Numis Securities analyst James Hamilton.
Nonetheless, he viewed weakness in ICAP shares as a buying opportunity, citing its strength in emerging markets, in post-trade services and the continued switch from voice broking to higher margin electronic broking. Citi analysts also thought the sell-off in ICAP's shares was overdone, and reiterated a "buy" rating on the stock.
Yallop said ICAP was protected by its diversity, with no one customer accounting for more than five percent of group revenues, and that it had seen little impact from the UK's ban on short-selling of financial stocks. "(It) has had a modest impact on some parts of our equities derivatives (business)," he said. At Friday's close, ICAP's shares had beaten the UK general finance index by 6 percent over the previous year.

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