TP ICAP (LSE:TCAP) has not been popular among investors since the Brexit vote and the share price has fallen nearly 50% in the last 12 months due to the pandemic and the Russia-Ukraine war. However, the company has been a beneficiary of higher levels of volatility and trading activity, as seen in the company’s Q1 trading update on 11 May. TP ICAP has currently a market capitalisation of £820m, though this article will demonstrate why it is significantly undervalued and is worth buying for my portfolio.
Firstly, the business has a book value of £1.9bn and is therefore trading at a discount to its book value, i.e. the sum of all its assets minus liabilities. If we look more closely at TP ICAP’s assets, we can use a sum-of-the-parts analysis to understand the undervaluation.
- As of 31 December 2021, the company had £784m of cash and cash equivalents on its balance sheet, which is equivalent to 95% of the market valuation.
- TP ICAP recently purchased Liquidnet, a leading electronic block crossing platform, for $700m (approximately £590m at today’s exchange rate)
- Lastly, TP ICAP is itself a cash-generative business. The company has been free cash flow positive and has produced on average £110m free cash flow over the last three years despite a pandemic.
| Year | 2021 | 2020 | 2019 |
| Cash from operating activities | £111m | £144m | £148m |
| Purchase of property, plant and equipment | (£23m) | (£35m) | (£13m) |
| Free cash flow | £88m | £109m | £135m |
Potential catalyst
A US activist, Phase 2 Partners, wrote to TP ICAP earlier this year to explore strategic alternatives to unlock value for existing investors who have suffered from a dramatic share-price underperformance over the last five years. Hence, there is a potential to benefit from a large capital appreciation if the company is sold.
City analysts have assigned an average target price of £2.63, representing a near 160% upside from the current share price. As compensation for waiting until the company is sold off or a turnaround happens, TP ICAP has a dividend yield of 9%+ which is above the FTSE 100 market average and provides protection against further share-price falls.
Risks
There are numerous risks to the above thesis. Firstly, there is no guarantee that a merger or acquisition will happen so I would have to bear this risk in mind.
Secondly, there has been some criticism on the wisdom of TP ICAP’s board decisions. With hindsight, the purchase of Liquidnet did not stop the long-term decline in the share price and the board should have opted for a different approach, for example through share repurchases, which has been lacking for a company trading at a steep discount to its book value.
Conclusion
Overall, TP ICAP offers quality assets trading at a discount, a strong potential for capital appreciation due to M&A, and a dividend yield providing protection against the share price falling further.
