As the financial industry rushes to embrace ‘fintech’ of all stripes, it must seem that the days of actual human brokers using phones to price and settle trades is long behind us. But the world’s largest over-the-counter broker, TP ICAP (LSE: TCAP), shows us that as long as there are large, illiquid markets that need reliable pricing data from a trusted intermediary, there will still be a place for humans.
The fact that the company is still an integral part of the financial system is clear in its very sold H1 results. In the period to June, the company’s pro forma revenues, which include the recently acquired voice broking division of NEX Group, rose 12% year-on-year (y/y) to £925m as demand for its voice broking and electronic trading services increased.
As the company digests this acquisition and cuts redundant costs such as overlapping IT systems, underlying operating margins bumped up from 14.1% to 15.6% y/y and underlying operating profit increased 23% to £144m. Results were less flattering on a statutory basis, but these underlying results give a better view of the health of the business by stripping away acquisition-related costs.
Looking forward, there is no doubt that voice broking is a business under threat. Management is well aware of this and has been investing heavily in building out its electronic services to co-exist alongside human brokers who still provide clients with in-depth knowledge about market conditions that no computer is able to provide.
By emphasising the benefits of accessing both state of the art electronic data as well as the human connection, TP ICAP is growing nicely by taking market share from smaller competitors, building out its capabilities in the energy business and sweeping up smaller institutional traders that big banks have cut to focus on a handful of huge clients.
TP ICAP may seem a bit of a throwback, especially compared to the solely tech-focused NEX Group. But with solid growth potential, a highly cash generative business model, a 3.4% dividend yield and attractive valuation of 15 times forward earnings, I see plenty to like about it.
The end of the line?
Another company swept up in recent merger talk is industrial workwear rental and laundry provider Berendsen (LSE: BRSN). After initially rejecting a series of bids from French competitor Elis earlier this year, the board finally recommended a takeover offer in June that consists of £5.40 and 0.403 Elis shares per Berendsen share that at the time held a combined value of £12.61.
The company’s shareholder will have their say on whether to accept the offer at the general meeting later this month, but if all goes to plan, Berendsen will be de-listed in early September. And while many large mergers go astray, there appears to be significant logic behind combining these two businesses.
The combined group will offer its services across most major European countries and will improve its pricing power, lead to some cost savings and give it a better platform to pursue smaller bolt-on acquisitions. Current shareholders will have to decide for themselves whether to sell their shares now and pocket a hefty premium or to stick with Elis, but either way, this takeover offer has been a boon to Berendsen’s struggling share price.
