The share price of TP ICAP (LSE: TCAP) has fallen by around a third today after the inter-deal broker announced a profit warning alongside the departure of its CEO. The company’s performance in the six months to 30 June has been relatively mixed, with revenue growth set to be offset to a large degree by expected cost increases. As a result, investor sentiment has weakened significantly.
However, the stock could offer turnaround potential in the long run. It appears to have a low valuation, as well as the prospect of improving financial performance in the coming years. Alongside a cheap FTSE 100 stock, it could be worth buying right now.
Difficult period
Although revenue in the six-month period was 3% higher than in the same period of the previous year at constant currency, ongoing cost headwinds are due to hurt its overall performance for the full year. Underlying operating profit for 2018 will be impacted by additional ongoing cost headwinds of around £10m related to Brexit, MIFID II, regulatory and legal costs, as well as IT security.
In addition, changing market conditions are due to increase broker compensation from 50.5% in 2017 to at least 51%. Meanwhile, near-term additional UK regulatory capital requirements and the refinancing of the revolving credit facility are set to increase finance costs to around £35m.
In 2019, further cost increases are now expected. Costs associated with Brexit, regulatory and legal, and IT security are due to rise from £10m in 2018 to £25m in 2019. Investments of around £15m are expected to be made, while finance costs are forecast to rise to £40m.
Investment potential
Clearly, TP ICAP is experiencing a challenging period. The replacement of its CEO has already taken place, with its Chief Commercial Officer taking up the position. In the short term, there could be further volatility ahead for the stock. However, it has a strong position in its markets and the potential for synergies in future following the recent merger. And with the stock now having a price-to-earnings (P/E) ratio of around 8.5, it seems to offer a wide margin of safety.
Recovery potential
Also having a low valuation at the present time is FTSE 100 diversified financial services company Prudential (LSE: PRU). Its shares have disappointed in the last year, underperforming the wider index by around 2%. This means that they now trade on a PE ratio of around 13, which indicates that they may offer significant growth potential.
Looking ahead to next year, the stock is forecast to grow its bottom line by around 10%. This is a stronger growth rate than many of its FTSE 100 peers and indicates that the company’s strategy is working well. Its focus on growing operations across Asia could yield improving financial performance, with the market for financial services products expected to increase rapidly over the long run.
With Prudential having a dividend yield of around 3%, it may lack relative income appeal today. But with growing profitability and dividend cover of three times, it could become a strong income share over the medium term.
