ICAP moving higher despite low volatility

The broking house will reveal its full-year figures on Tuesday 19 May, and it is still coming under pressure from increased regulation and lower market volatility.

ICAP
Source: Bloomberg

It has been a difficult few years for ICAP. In the wake of the credit crisis, the regulators have been introducing tougher new rules in relation to derivative trading, and large investment banks are also trimming back their trading operations.

To add to ICAPS’s problems, the financial markets have relatively low market volatility – large market swings tend to boost volumes in the broking business. The Federal Reserve is tipped to increase rates this year, and in that event market volatility will pick up, and this will boost ICAP’s revenue stream.

The London-listed firm reported a 15% drop in revenue and a 10% decline in profits for the first six months of the year in November, and the drop off in earnings has been taking place for a number of years now. The company received bad press when it became entangled in the LIBOR rigging scandal, and it was fined £11 million in February.

ICAP’s share price was boosted by the Conservative majority victory in the election, as the CEO Michael Spencer previously stated he would consider relocating the headquarters out of the UK if the Labour party were victorious. The City of London firm have got over the election hurdle, and the next big political question will be a referendum on the UK’s membership of the EU.

Mr Spencer is on the eurosceptic side of the divide, and if a referendum is put in palace it will have a big impact on the company’s share price. 

When ICAP announces its full-year numbers, the market is expecting revenue of £1.27 billion adjusted and a net income of £178 million. These forecasts represent an 8.6% drop in revenue and an 18% decline in adjusted net profit.

The inter-dealer broker will also reveal its second-half numbers on the same date, and the market is anticipating revenue of £637 million and adjusted net income of £109 million. The first-half numbers from the broking house have failed to meet estimates. Revenue was £620 million, and adjusted net income was £66 million, which compares with expectations of £631 million and £74 million respectively.

Equity analyst are moderately bullish on ICAP, and out of the 15 recommendations, one is a buy, 11 are holds, and three are sells. The average target price is £5.21, which is 7% below the current price. Investment banks are also moderately bullish on [shares:TLPR-UK|Tullett Prebon], and out of the 12 ratings, three are buys, eights are holds, and one is a sell. The average price target is 375p, which is the fractionally higher than the current price.

ICAP’s stock has been in an upward trend since August, and the 50-day moving average is acting as support at £5.45. The resistance at £5.75 is the initial upside target, and a move through it will put £6 on the radar. On the cusp of recession in 2008, £7 per share was achieved, and it seems unlikely we will see this level in the near future. A major area of resistance has been £5.75, and if this is failed to be cleared, the stock could revert back to £5.45 and £5.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.