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Tullett Prebon specialises in acting as an intermediary for banks to trade financial products, and usually deals in instruments that are not offered on exchanges. A drop in market volatility and a more prudent attitude to risk at major banks have seen revenues and profits decline at the interdealer broker.
The company’s first-half update revealed a 15% decline in revenues, and low trading volumes were blamed for the tumble in income. Tullett’s problems are threefold; market volatility has waned since the heady days of the credit and eurozone debt crisis, investment banks are trimming their trading operations, and tighter regulation on derivatives dealing.
Unfortunately all of the above issues are outside of Tullett Prebon’s control, but the broking house is taking measures to improve its position. The company has already reduced its headcount by nearly 10%, and most of the job cuts were in the front office. The firm is making a concerted effort to gain more exposure to the more transparent electronic broking side of the business, and away from the traditional voice broking. Even though Tullett has shut down a number of unprofitable broking desks to cut costs, the firm is also on the acquisition trail and it bought a team of 40 brokers to beef up its US operation.
Tullett Prebon will reveal its full-year numbers on Tuesday 3 March, and the consensus is for revenue of £703 million, and adjusted net income of £66 million. These forecasts represent a 12.4% decline in revenue and a 15.3% drop in adjusted net profit. The broking firm will also announce its second-half figures on the same date, and the market is expecting revenue and adjusted net income of £352 million and £28 million respectively. The first-half update was not well received by investors. The revenue came in at £360 million and the adjusted net profit was £31 million, versus market expectations of £380 million and £39 million respectively.
Equity analysts are bullish on Tullett Prebon, and out of the 14 recommendations, four are buys, eight are holds and two are sells. The average target price is 324p, which is 5% below the current price. Investment banks are a touch on the bearish side when it comes to rival ICAP. Out of the 17 ratings, one is a buy, ten are holds and six are sells. The average target price is 421p, which is 21% below the current price.
The stock has been in an upward trend since December and the 320p level is providing support. If this level is held the initial target will be 360p and then 400p will be on the radar. If 320p is punctured, then the downside support at 300p will brought into play, and a move through that mark will put 280p in view.