Less than the sum of its parts

TP Icap’s shares are down by more than 60% since the merger was completed in 2016. They are now trading on six times forecast 2023 earnings, according to Sharepad. That’s a similar multiple to a bank such as NatWest, even though TP Icap is a broker, not a lender. The London Stock Exchange (LSE), which makes money with market data and posttrade servicing in a similar way to TP Icap, is a closer peer. The LSE is on 23 times forecast 2023 earnings or six times historic sales.

Justin Hughes, who runs Phase 2, the activist fund that has bought around 1% of TP Icap, argues that “global platforms are extremely valuable and expensive to build”. Still, the 2016 merger has not been a success. The earnings before interest and tax (Ebit) margin has fallen from 14.8% to 12.5%, despite the benefits of scale and opportunities to cut costs. This looks even worse given that the Liquidnet blocktrading business TP Icap bought in 2019 for $700m had higher margins, and Parameta, a market data and posttrade business with low double-digit organic growth prospects has 50% margins, according to Hughes.

The market cap of £1.2bn implies a price to sales ratio of 0.6. That compares to the 2.1 times sales TP Icap paid for Liquidnet in 2019. An enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda) of five is also low when businesses comparable to Parameta trade at high-teens multiples.

Predictably, Hughes would like TP Icap to improve margins, cut costs and buy back shares. If this doesn’t work, he suggests more valuable divisions (Liquidnet, Parameta) should be sold off and the proceeds returned to shareholders. That may be easier said than done – but TP Icap is clearly cheap and may benefit from a change in regulators’ attitude towards voice broking and OTC markets.