After my 20%+ gains earlier in the year on Investec, I thought I would try another trade in the financials sector. I'm staying in the I's with Intermediate Capital Group (ICP) which announced final results earlier this week. You can read them for yourself at the link above and they didn't look too bad to me - certainly not to justify a 10% fall in the share price. Looks like a big clumsy seller has been in operation. The only negative I could find was a bearish note from Numis, who have a 363 pence price target, which I saw mentioned on Ticker Report, although I note others are more bullish and have price targets beginning with a 5.
Any way this one may not be to everyone's taste as it is slightly esoteric is so far as it is a specialist asset manager providing mezzanine finance, private debt, leveraged credit and minority equity to mid market corporates in Europe, Asia and the US and to real estate in the UK. Some of their balance sheet is invested alongside their funds and also provide seed capital when they are launching new products. Aside from income from managing the funds they also make irregular capital gains on their own investments as and when they make successful disposals of their largely private equity / venture capital style investments. These tend to be lumpy and have been strong in the last year given the favourable market conditions. Given the nature of their investments they do however also have to make provisions and take write downs when things don't go as planned. The disposals can also reduce their assets that they have under management and they therefore then need to work hard to replace these which is the situation at the moment.
The earnings from the asset management and other recurring fees or what they describe as "core" earnings generally underpin the dividend with the capital gains being a big swing factor for earnings over and above that. Talking of dividends that is the other main attraction with this one. They declared a final of 14.4 pence which alone yields 3.6% at 400 pence and is due to go XD on 11th June 2014. This made 21 pence for the year up 5% and a similar increase expected for this year taking the dividend to 22 pence or so for a yield of 5.5% and the P/E is around 11 to 12x, so reasonable value I would argue.
They suggest their balance sheet is strong with unutilised cash and debt facilities of approximately £678m. They have also launched a £100 million share buy back programme, which they commenced the day after the results. On the balance sheet they said the following:
"We consider it important that the Group maintains a strong balance sheet position with a consistent access to the debt markets. Accordingly, considerations such as maintaining a strong and stable credit rating and the financial covenants to lenders are factored into the Board's assessment of the Group's capital structure.
We also understand the value that shareholders place on regular and sustainable dividend payments and we remain committed to a dividend policy linked to cash core income. In addition to this, we perform an ongoing assessment of the Group's capital requirements with reference to the above factors over a three year horizon and should there be any capital surplus to requirements, we will look to return capital to shareholders at the appropriate time."
This is interesting because I feel I should point out that this one had to have a rights issue and cut its dividend in 2009 and dividends have yet to recover to those levels, although it had a strong track record of dividend growth prior to that. So hopefully they have learned from that experience and will manage the balance sheet and dividends more carefully going forward, although to be fair 2008 / 2009 were pretty exceptional times.
The share buy back might clear out the sellers and help to support the shares at around their current 12 month lows just under 400 pence. On the upside the top of the trading range in the last 12 months has been around 500 pence, so if it were to make it back up there in the next year or so then that would offer a potential total return of 25 to 30% - depending on how many dividend are collected along the way.