Ouch.
That’s the price action in Icap on Friday morning after the inter-dealer broker warned on profits.
Icap now expects underlying pretax profits for the year to March 2010 to come in between £295-£315m. To put that figure in perspective, back in November, management told the City they were confident of meeting consensus underlying March 2010 PBT forecasts of £311m-£347m.
So what’s gone wrong? The answer seems to be that new investments are taking longer than expected to achieve profitability, according to analysts.
Citigroup:
Miss blamed on new investments taking longer to achieve profitability – ICAP details that the trend of softer volumes mid-Nov to end-Dec hit interest rate products. However, their lowered PBT guidance is more attributed to investments taking longer to break-even. We understand this refers to slower-than-expected equities volumes and the Brazilian integration taking longer to strip out costs.
Bank of America Merrill Lynch:
The issue appears to lie in the company’s new businesses. These were broken out in H1, when it transpired that overall the new businesses had lost £7m. At the time, the company was optimistic that these businesses would begin to be profitable. Judging by the company’s narrative, this is not the case; the performance here is described as “mixed”. Crudely, it sounds as if Brazil is performing decently and ship broking and cash equities are finding the going tough.
Now, one could argue that this morning’s 18 per cent fall, which has wiped £400m per cent off Icap’s market value, is something of an overreaction, especially given recent weakness in the share price.
But the City is likely to be less than impressed by the fact that Icap boss – and Conservative party treasurer – Michael Spencer recently sold stock.
From RNS on January 11th.
“On 11 January 2010 IPGL’s subsidiary company INCAP Finance B.V. sold 7,000,000 of the 118,069,560 ICAP plc ordinary shares it owns at a price of £4.40 per share.
The proceeds from this sale will be used by IPGL to continue the reduction in leverage on its balance sheet in which it has made significant progress during the past year. IPGL had previously planned to make other asset disposals, as part of the rebalancing of its investment portfolio, a process which it expects to revisit as liquidity & value returns to alternative asset classes.
Michael Spencer, the founder and chief executive of ICAP plc, together with his wife and family trusts, are majority shareholders of IPGL Limited. In addition, Michael Spencer sold 3,308,248 at a price of £4.40 per share of the 6,140,778 ICAP plc ordinary shares comprising his personal interests.
Following this transaction, Michael Spencer had a personal interest in 2,832,530 ICAP plc ordinary shares and through IPGL he had a further interest in 111,069,560 ordinary shares. Together these represent 17.4% of ICAP plc’s share capital.”
So a total of 10.3m shares sold at 440p less than a month before a profits warning. (At pixel time, the current share price is 308p)
For what it is worth, Icap has also made some comments about the “Volcker rule”. They are sticking to the line that prop trading only represents around 2-5 per cent of banks trading revenues and therefore the hit to its business will not be significant.
Related link:
The Volcker rule, the impact on IDBs (part III) – FT Alphaville