Tullett Prebon
You get an idea, when looking at Tullett Prebon’s 2010 figures, why these inter-dealer bonds brokers are so keen to sue when they poach each other’s staff. A raid by the rival BGC Partners on its highly-paid employees in the United States in late 2009 blew a huge hole in the business, and in the figures.
Revenues in 2010 were 4 per cent lower at £908.5 million. They would have been unchanged but for the raid, which means that the shortfall represented a loss of business of almost £40 million. Tullett and its bigger rival Icap make margins of approaching 17 per cent, which implies lost profits of about £7 million.
Then the company had to rush to fill the gap by hiring staff from a much smaller rival. These cost about $27 million, or about $1 million each including payments to compensate their former employer. Bonds traders are highly specialised and highly paid, and they will have joined on high starting salaries that will take a long time to see a proper pay-back from the normal run of business.
The American operation is not likely to be back to where it was in 2009 until next year, which means further loss of revenues in profits. Little surprise, then, that the damages Tullett will eventually seek from its rival could reach $100 million, and that is before another unrelated action for damages in London for an estimated £14 million kicks off later this month.
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Tullett’s figures for last year were respectable enough, as it was a year that saw rather less market volatility of the sort such companies like than in 2009, for which the rest of us may be thankful. Several brokers have convinced themselves that the company has as much as £150 million of excess capital piled up, not least Collins Stewart, which used to be part of the same stable before the 2007 demerger but downgraded the shares yesterday out of disappointment at the dividend, a final of 10½p making a total up 5 per cent at 15¾p. The company says it needs to wait until next year and a regulatory ruling on the reserves it needs to maintain, before any decision on its capital structure can be made. Encouragingly, underlying revenues so far this year are already 3 per cent up on the same time in 2010.
The shares, a Tempus tip for 2011, are a touch ahead of where they were at the start of the year, having recovered much of yesterday’s falls to end 5p down at 421p. They now sell on little more than eight times’ this year’s earnings. That still looks cheap, even after you factor in the prospects for further consolidation in the sector.
Inchcape
It seems appropriate that Inchcape should be planning its next big expansion into Asia. Founded as a trading combine around the time of the Crimean War, it made its name doing business in South East Asia. Now slimmed down into a pure motor retailer and distributor, albeit one with a position in 26 different countries, Inchcape now plans a £170 million expansion over the next five years in China.
This will expand its pilot operation there from three outlets to twenty, at a cost of about £10 million each. Inchcape plans to stay in the wealthy coastal regions, eschewing, for now, Beijing and the less developed interior.
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The move makes perfect sense; the emerging Chinese middle class are probably the most reliable purchasers on Earth at present of upmarket marques such as Jaguar, Land Rover, Lexus and Toyota. China is folded into Russia and other emerging markets in Inchcape’s 2010 figures and probably made an insignificant contribution to a 30 per cent rise in retail sales and more than trebled profits from retail, but sales from that country were still up 31 per cent.
Despite its market leadership in 14 of its chosen markets and its emphasis on more upmarket, higher-margin brands, Inchcape’s 2010 figures give an idea why car retail is not an easy place to be. Overall margins, including those from more profitable distribution deals, advanced from 3.5 per cent in 2009 to 4.2 per cent last year.
Sales were back in growth, up 2.6 per cent in constant currency rates to £5,885 million, while heavy cost-cutting left pre-tax profits before exceptionals 31 per cent higher at £214 million.
The good news for investors is that Inchcape is paying a 6.6p dividend, the first since 2008, but this implies a yield of only about 2.6 per cent this financial year, while the shares are on almost 12 times’ this year’s earnings. Not attractive at this level.
Spirax-Sarco
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Spirax-Sarco Engineering is yet another of those companies that seems to have bounced out of the recession with indecent haste and is now seeking to boost shareholder returns, in its case by paying an unexpected 25p-a-share special dividend.
This is in addition to the 30p final and total of 36.1p, up by 19 per cent, and helped to propel the shares to an all-time high of £20.57p before profit-taking left the shares a mere 0.3 per cent higher at £19.49½p.
Investors can hardly complain that the company is not stretching its balance sheet to the full. There is £34 million in the bank, the special dividend will soak up £20 million and the company plans capital spending of about £30 million in the current year.
This is over and above whatever it spends on acquisitions. Its main business produces systems that manages steam processes in a range of industries, but a second is faster-growing and more likely to be targeted for expansion. This is Watson-Marley, which makes peristaltic pumps for use in the pharmaceutical and foods industries.
Sales, at constant exchange levels, were 11 per cent higher at £589.7 million, while adjusted profits before tax were up 29 per cent to £121.6 million. On their present level, the shares sell on about 16 times’ this year’s earnings. A bit chunky, assuming no further special dividend payments. Hold.
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BG Group
Most corporates, when asked to comment on market rumours, fall back on a meaningless “we never comment on speculation”. Note BG Group’s robust comment on suggestions that it might buy the assets there of Heritage Oil, a frequent entrant on the more speculative investor bulletin boards. “Iraq does not form part of BG’s current plans,” says the company, one of the Tempus top tips for 2011. That seems to put it beyond doubt, then.