TP Icap PLC (LON:TCAP) slumped after Shore Capital downgraded the stock to ‘sell’ on concerns that the interdealer brokerage is being overvalued.
Analysts at Shore Cap cut their recommendation on the FTSE 250 company from ‘hold’, noting that the stock is currently trading at 12 times its forecast earnings for the next year, compared to an estimated 315p fair value for the stock.
“The current circa 30% premium, in our view, is not justified and we struggle on fundamentals to reason why TCAP should be worth more than its long-term average valuation,” said the analysts in a note to clients on Monday.
TP Icap’s shares have soared 43% over the past year, getting a recent lift from a bullish trading update in November, in which the company boasted higher sales and “favourable market conditions” in the third quarter, especially in energy and commodities and institutional services.
Revenues of £478mln in the three months to 30 September were up 17% on last year, or 13% if currency swings are ignored, both a big improvement on the 1% growth in the first half.
“Structural price pressures inhibit revenue growth to 1-2% per year, so costs ought to be the lever for profit growth,” said Shore Cap.
“However, we anticipate a pick-up in infrastructure investment, which should deliver long-term productivity benefits however constrains EPS growth in the near term.”
Nevertheless, analysts said the risk to current-year consensus EPS is “on balance to the upside, however we would use what may be a final round of upgrades to lock-in profits at a premium rating on above-normal, near-term trading conditions”.
Shares sank 3% to 391.5p in mid-morning trading on Monday.