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Tullett Prebon (LON:TLPR) report: Final results: volume pressure and regulatory uncertainty

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

- Performance - results show flat revenue y-on-y at ?947.7m (-9% constant currency), adj. PBT +1% to ?157.0m and adj. EPS +4% to 49.2p. FY DPS +18% to 15.0p. Strong cash conversion, with operating cash flow of ?137.9m.

- Margins - operating margin was -0.6% to 18.0%, reflecting solid cost control. However, this could be flattered by the defection of 77 brokers between August and December '09.

- Product trends - reduced risk tolerance and industry leverage has resulted in a shift of capital towards flow products, cash products and first order derivatives. Tullett's relative strength in fx, interest rate swaps and government and corporate bonds (flow products) has served it well. Notwithstanding this, there were still significant declines in certain product revenues, notably interest rate derivatives (-22%) and equities (+32%). Post trade service revenue advanced strongly, +32% to ?25.1m, but its contribution is not currently material at just 3% of Group total.

- Regulatory issues - TLPR believes there is opacity on the timing and impact on volumes of proposed measures to increase capital and liquidity requirements (and activity restrictions) within the OTC markets. It does not expect a complete standardisation of the OTC market as this would fundamentally undermine counterparts' ability to manage risk. It also argues that the migration to electronic execution will be less significant that some commentators imply, given only the most liquid and standardised products are suited to such platforms. Its views on the use of CCPs are similar; not all products will be suited to centralised clearing.

- Balance sheet - TLPR's debt is comprised of ?141.1m Eurobond July 2016, ?8.8m Eurobond Aug 2014, ?240m drawn under an amortising term loan facility (majority of this - ?180m - matures in Jan 2012). The Group has a net cash position of ?9.0m.

 
- Outlook - the slowdown in activity witnessed in H2'09 has continued into the first 2 months of FY'10, with underlying (constant currency) revenue run rate 5% below the corresponding period in 09; TLPR expects this runrate to improve during the remainder of '09 however we remain cautious. Additionally, the net effect of broker defections has been to reduce revenue by 6%, although the Group has taken remedial actions, including increasing its hiring.

- No guidance has been provided on 2010 earnings. Whilst we continue to believe a significant role exists for the inter-dealer brokers within the OTC markets, we are cognizant that considerable regulatory uncertainty continues to weigh. In our view, sector peer ICAP (IAP.L) continues to be the most well-prepared of the IDBs to tackle the implied regulatory changes through the heavy investment it has made in e-broking and post trade services. We will continue to monitor volumes carefully and look for a sustained recovery before taking a more positive stance on the sector.