The Cash Generating Inter-Dealer

Published in Company Comment on 8 June 2011

Over-the-counter profits have been good for this financial market intermediary.

Investors don't care much for uncertainty, and when it exists, the result can be attractively valued businesses listed on the stock exchange.

Such could be the case with FTSE 250 company Tullett Prebon (LSE: TLPR), which operates as an inter-dealer broker.


Tullett's business is to act as an intermediary in wholesale financial markets for clients such as commercial and investment banks. These are over-the-counter (OTC) markets, where Tullett provides a buy and sell facility for investors rather than the usual order matching service seen on stock exchanges like the London Stock Exchange.

According to its website, the company brokers in markets around the world such as volatility, rates, non-banking, treasury, energy, commodities, credit and equities, and also provides market information services, too.

Since the company was demerged from well-known broker Collins Stewart Tullett at the end of 2006, business has been good. However, the finance industry has been subject to regulatory uncertainty and excessive market volatility in recent years. 

On top of that, Tullett suffered a poaching raid from a competitor in its US, London, Hong Kong and Singapore operations in 2009, which led to an outflow of staff and a decline in revenue and profits.


It is currently engaged in rebuilding its US operation and pursuing compensation for damages through international legal systems, but all of this uncertainty appears to be weighing on the share price if the almost three times covered forward yield of around 4.4% for 2011 is anything to go by.

Analysts are predicting forward price to earnings ratios of just over eight for 2011 and around 7.7 for 2012 at the current share price of about 370p and market cap of £800m. This compares well to its larger rival ICAP (LSE: IAP), which has a forward PER of 11.5 pencilled in for 2012.


Looking at Tullett's growth record, it's easy to see the potential for the shares if the current headwinds begin to subside:

Revenue (£m)754944948908
Net profit (£m)7495111109
Diluted earnings per share34.2p44p51.2p50.3p
Net cash from operations (£m)831368595

Despite its troubles, the company has managed to maintain its progressive dividend policy, which has maintained healthy coverage from net profits and strong cash flow backing.

At the last showing, the company had debt of around £360m, which throws up a gross gearing figure of about 87%. However, there has been good progress on debt reduction as gearing has fallen from its peak of around 340% in 2007. The debt is offset by around £390m cash on the balance sheet, which has built up from around £262m in 2007. In fact, Tullett has been a cash-generating machine and that trend may continue.


In its latest guidance, released in an interim management statement on 12 May, Tullett informed us that it had settled its dispute with regard to poaching from the London office but that legal action continues in the US, Hong Kong and Singapore.

On general markets, the company said:

"The world's financial markets remain unsettled and the level of activity in the markets during the first quarter was at very similar levels to the same period last year. Activity slowed somewhat during April."

In common with many other shares, it looks like investors are playing a waiting game for general economic stability and a reduction in market volatility. Meanwhile, that well-covered dividend should console holders, along with the knowledge that a purchase now is made at a relatively undemanding multiple.

The shares, which rallied strongly from the fearful depths of the credit crunch, have been stable for some time, and investors comfortable with the esoterics of the business model could find the current metrics attractive, given the reassuring way that the company generates cash with its operations.

To me, Tullett is worth further research with a five-year holding time-scale in mind. The only reservation I have is the lack of visibility as it is more difficult for me to understand Tullett's business than the likes of Greggs (LSE: GRG) or Morrisons (LSE: MRW), for example. That said, Tullett's figures look attractive, and if the business keeps performing well, value could become compelling.

More from Kevin Godbold:

> Kevin owns shares in Morrison.

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