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TP ICAP – from an environment “increasingly constructive” & synergies “firmly on track” to profit warning & synergies “reappraised”… in 2 months!

By Steve Moore | Tuesday 10 July 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Shares in TP ICAP (TCAP) are currently slumping on the back of a Trading update and directorate changes announcement. This though commences “revenues for the six months to 30 June were 3% higher than the prior year at constant exchange rates and 2% lower as reported. This is consistent with 2018 full year revenue guidance provided in March”. So, what’s the problem?

“Underlying operating profit for 2018 will be impacted by additional ongoing cost headwinds of around £10m, relating to Brexit, MIFID II, regulatory and legal costs and IT security. Market forces are expected to increase broker compensation in 2018 from 50.5% in FY 2017 to at least 51%. Near-term additional UK regulatory capital requirements and the refinancing of the revolving credit facility are likely to increase finance costs in 2018 to around £35m. As a result, earnings per share for 2018 are expected to be slightly below the bottom-end of the range of analyst expectations”. Hmmm, slightly below bottom-end clearly far from ideal, but no disaster. What about further out?...

“The board has reappraised its approach to the integration and the ongoing investment needs of the business in the light of the evolving industry landscape. As a result the group is reducing its synergy target from £100m to £75m by the end of 2019 on an annualised basis… 2019 will see the cost associated with Brexit, regulatory and legal, and IT security increase… to £25m. In addition, the group plans to make strategic organic investments of around £15m… Finance costs… will increase to around £40m in 2019.”

This compares to as recently as 10th May it updated; “the integration of TP ICAP remains our number one priority and we remain firmly on track to deliver our target of £100m of synergies… In markets the global rates environment continues to be increasingly constructive and bouts of volatility seem likely to continue. We also continue to progress our plans for growth in Data & Analytics, Institutional Services and Energy & Commodities.”

November saw CFO Andrew Baddeley ‘step down’ and now apparently “it has become clear that a change of leadership is required to execute our medium-term growth strategy and deliver the detail of the integration process”. This sees “John Phizackerley is leaving his post as Chief Executive and as a member of the board with immediate effect and has been replaced by Nicolas Breteau, subject to FCA approval. Nicolas joined Tullett Prebon in 2016 as Chief Commercial Officer and currently leads TP ICAP's largest business, Global Broking. In addition, Robin Stewart has been appointed as Chief Financial Officer on a permanent basis, subject to FCA approval. Robin joined Collins Stewart Tullett Plc in 2003 as Head of Tax and has been acting as the company's Interim Chief Financial Officer since November 2017”. Chairman Rupert Robson argues, while “the evolving landscape is driving up costs across our industry… the acquisition of ICAP has given us greater scale to withstand this pressure. The potential for these combined businesses remains extremely compelling and this will be evidenced in the coming years”.

However, with it just two months after “the global rates environment continues to be increasingly constructive… we also continue to progress our plans for growth… firmly on track to deliver our target of £100m of synergies”, a profit warning and synergies materially reduced due to the evolution of the industry, I’d suggest there can be precious little confidence at present in what will be evidenced in the coming periods here. Thus, not one I’d want to own at this juncture.

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