The future looks bright for Icap

Sep 22 2008 by Peter McCusker, The Journal

WE are upgrading ICAP back to outperform following prolonged share price weakness.

There are concerns that ICAP may fail to match the very high volumes of 2007, but the fundamental investment case remains the same, with management expecting medium term industry revenue growth of 5%- to 10%.

We expect Increasing use of derivatives by hedge funds and banks to underpin demand, while the strong balance sheet and cash generation should allow for growth through acquisition.

Although the very high volumes of 2007 may be hard to match this year, we expect the continuing difficulties in financial markets to benefit ICAP, particularly in interest rates and energy. The fixed cost nature of the expanding electronic trading platform should allow bottom line growth to be even higher. Qualitatively, we consider ICAP a high quality franchise with a strong management team.

It is also the world’s largest IDB (Interdealer Broker), and with talks between GFI and Tullett Prebon now abandoned, its strong competitive position looks set to continue.

We downgraded ICAP at the start of the year when it was trading at much higher multiples. With no real change to the outlook, and the valuation now much less demanding, we upgrade to buy.

SAB Miller – We are upgrading our recommendation on SABMiller to outperform and raising our fair value estimate to 1440p, which is now based on calendar 2009 forecasts. We have only modestly raised our forecasts for the current year (<1%) on favourable currency movements.

We expect the next two quarterly trading statements to reveal only moderate volume growth and margins may be impacted by cost pressures in 2008/09.

But we believe the outlook for 2009/10 is very positive, when we should see the initial cost savings from the Miller/Molson Coors merger, the benefits from investment in Latin America, increased market share in South Africa and improved profits due to increased pricing in China.

We discount any additional benefits from favourable currency movements, but we forecast that SABMiller could deliver annual earnings growth in mid to high teens over the next three years. Our revised fair value estimate is equivalent to a P/E ratio of 15.7 times calendar 2009 forecasts.

Vodafone – We currently carry a buy recommendation on Vodafone, with a 185p fair value based on a DCF valuation.

The telecommunication sector has struggled in 2008, due mainly to regulatory concerns, which look more than discounted in share prices and as the sector has not proved to be as resilient to the economic downturn as expected.

Vodafone has suffered along with the sector but its derating looks unfair in our view. There is some weakness in European operations, but currency movements will reduce downgrades and the company has an attractive growth profile in emerging markets, supporting group forecasts.

Its high yield means it should be a relatively safe haven in volatile equity markets. Our preference within the UK telecommunication sector remains Vodafone against BT and we would buy the shares now to take advantage of current weakness in the price.

Andrew Miller – Barclays Wealth regional centre head