Gung-ho approach will see firm win in the end

Icap’s confirmation that it is reviewing its loss-making cash equities businesses, largely responsible for its profit warning earlier this month, did little to boost its ailing share price. The cash equity division, which involves around 200 brokers in its voice arm operations, is now likely to be wound down or sold. This business formed a major part of the £38m that Icap spent in the six months to November last year, and according to Singer is responsible for at least £10m of the £25m it guided full year pre-tax profit expectations lower by. But its aggressive expansion into this area was brave. In the aftermath of Lehman’s collapse, it meant that Icap was expanding as rivals were downsizing in a bit to steal the territory occupied by collapsed mid-tier brokers such as ABN Amro and Bear Stearns. Ultimately, it didn’t work, but it is exactly this gung-ho approach which has enabled it to build a profitable core – its voice, electronic and post trade businesses. The electronic businesses will contribute over 60 per cent of its estimated £295m-£315m profit for the financial year ending 31 March. That’s up from next to nothing just six years ago. In January overall daily electronic volumes for Icap’s key markets reached $666.6bn – the highest level since October 2008, and an increase of 24 per cent on January 2009, indicating a solid long term outlook. Yet, the shares are down a third this year. With its market cap of just £2.2bn, it is trading on a prospective price to earnings multiple of just ten times. As Merrill Lynch sums up, the “risk reward is tipped heavily in favour of investors.”