Broker tips: ICAP, Ocado, Lloyd's insurers

1st Sep 2010 13:15

Inter-dealer broker ICAP is set to launch a new electronic platform for euro interest rate swaps (IRS) on 6 September, which suggests to ICAP fan Panmure Gordon that dealers are warming to the faceless alternative to telephonic transactions."Significantly, the initiative has the liquidity support of at least three major market participants, including Barcap, Deutsche and J.P. Morgan," notes Panmure analyst Vivek Raja. "We continue to believe that ICAP's higher margin Electronic broking and Post trade businesses, both scalable and with high barriers to entry, are poised to benefit from structural reforms," Raja added in a note that reiterated the broker's "buy" recommendation.The analyst's conversation with representatives from ICAP indicates that dealers are less resistant to electronic trading of IRS than they were when i-swaps were launched in 2001."The increasing regulatory focus on standardisation and clearability of derivative contracts, together with an overarching drive to improve OTC [over the counter] market transparency, we expect are making it increasingly difficult for the dealers to resist the transition to electronic in IRS," Panmure Gordon said.ICAP has not provided guidance on revenue contribution or margin of electronic IRS trading but Panmure Gordon is not expecting a significant impact to current year estimates. The contribution to revenues from electronic rates trading is expected to become more meaningful from 2013 onwards which the broker thinks supports its expectation of ICAP's Electronic broking division delivering double-digit compound earnings growth from 2010-13.The flotation of loss-making grocery delivery outfit Ocado was a humbling experience for some of the City's biggest names and a wallet-damaging one for shareholders persuaded to support it.The company's expected imminent promotion to the FTSE 250 could boost demand for the shares, reckons JP Morgan Cazenove, one of the joint-sponsors of the flotation. Results next Tuesday could also be a catalyst for the shares to pull out of their slump; the shares were floated at 180p, after initial plans to float them somewhere between 200p to 275p, but even at that lower price the shares have proved unpopular and languish below 150p.Cazenove, though, still has faith and has plonked a 180p price target on the company's shares, though it admits "valuing Ocado is a challenge." Barclays Capital is marginally more optimistic and has a price target of 185p.Hurricane season is underway and a 120 miles per hour category four hurricane, 'hurricane Earl', could hit land in North America later this year. For once, it looks as if the Gulf of Mexico will not be affected but a number of Lloyd's syndicates will be monitoring its progress for fear it will hit the eastern seaboard of the USA.Research firm Equity Development said "there is a (very low probability) risk of it hitting New York or one of the other cities in New England and a significantly higher but far cheaper risk that it will hit Nova Scotia, by which time it may have fallen back to a Category 2 storm. It is also possible that it will hit the Carolinas, an area materially less 'expensive' for insurers," analyst John Borgars speculates.The Lloyd's syndicates most exposed to risk, according to Borgars, "are the three side-car syndicates 6103 (MAP), 6104 (Hiscox) and 6106 (Amlin)," all of which appeared to be "staggeringly profitable" in 2009.If hurricane Earl does make landfall then Equity Development will cool a little on the Lloyd's sector, even though it believes there are many constituents of it that are undervalued."It is obviously a case of watch and wait: the biggest financial impact, this side of the ocean, if Hurricane Earl hits land in the USA will be on the individual Names backing the sidecar syndicates, with a much smaller effect on shareholders in Amlin, Beazley, Chaucer, Hampden (it has provided a modest amount of capital to most of these syndicates) and Hiscox," the research firm said.