Interactive Investor

Time to buy bombed-out Tullett?

29th July 2014 14:04

Lee Wild from interactive investor

The first half of 2014 has not been kind to interdealer broker Tullett Prebon. In fact, it's been terrible, and interim results were worse-than-feared. However, a purge on costs is expected to at least stabilise earnings, and investors are finding a 7% dividend yield difficult to resist.

Clearly, business is bad. Tullett relies on volatility to drive volumes, but many asset classes have been relatively lifeless. Indeed, most measures have reached post financial crisis lows. Goldman Sachs points out that bond market and FX market volatility are currently 41% and 52% below their 10-year averages.

That's why revenue at Tullett sank by almost a fifth to £360.3 million in the six months ended 30 June compared with City forecasts for a 15% decline. It was down even more in May and June. Underlying operating profit plunged by 30% to £50.3 million, although that was largely in step with forecasts, giving underlying earnings per share of 16p. Crucially, the dividend is unchanged at 5.6p.

Chief executive Terry Smith is urging caution. "We cannot predict when the level of activity in the financial markets we serve may increase, and it would be prudent to expect that market conditions will continue to be difficult," said the City legend who steps down at the end of August.

He'll remain as a consultant for a couple of years, but incoming boss John Phizackerley, a former Nomura and Lehman Brothers executive, will have his hands full. Not least in driving through the planned cost savings.

Tullett now plans to slash annual fixed costs by over £40 million. That means a cull in the both the trading room and among back office staff - about 210 will go in all - but should improve operating profit by about £35 million a year. Tullett expects to do about half of that over the next six months. This kind of cut doesn't come cheap - the bill is currently put at £42 million.

Having traded close to 400p in January, Tullett shares now change hands for 247p, near a 19-month low. That puts them on less than eight times HSBC's forecast earnings per share of 31.4p for this year. And there's a forward dividend yield of almost 7%, which the broker reckons is safe.

"With a significantly lower fixed cost base compared to 24 months back, we believe the business is well positioned to benefit from any pick-up in trading activity," says HSBC analyst Nitin Arora who reckons the shares could be worth 311p. They might be one day, but not before there's a significant pick-up in volatility. In the meantime, that dividend yield is highly attractive.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Related Categories

    Income Investor