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Real Estate Broker Spinoff Will Benefit from NDAQ Share Monetization & Acquisition-Led Growth

The Edge View...
The market has hammered BGC Partners, Inc.’s (BGCP) share price, which has declined by -34.1% in the last year compared to the NASDAQ Composite Index return of +2.3% in the same period. We believe the decline was primarily due to the short-term earnings pressure owing to recent acquisitions by the company and further accelerated by the share price plunge of its closest peer, TCAP. We believe the plunge in TCAP’s share price was due to the cost escalation because of a recent acquisition. This led to the departure of CEO John Phizackerley in July 2018. In BGCP’s case, the management is much more stable and acquisition-led growth will benefit the company in the mid- to long-term.

We see the price decline in BGCP as a buying opportunity to leverage on the potential upside of +34.1% in BGCP (combined, pre-Spin) as we believe the decline was primarily due to short-term earnings pressure owing to recent acquisitions by the company. We believe the acquisitions will benefit BGCP in the mid- to long-term. The company is the second-largest interdealer broker in the world, with a market share of 35.5%. Another key positive is the removal of the Negative watch rating from Fitch Ratings, citing the successful execution of capital raising from the NMRK IPO and other de-leveraging actions. Lastly, BGCP has the highest dividend yield (5.9) compared to the average yields of its peers, NASDAQ, Inc. (NDAQ, 1.5%) and TP ICAP Plc (TCAP, 4.4%).

Newmark Group, Inc. (NMRK) is the fifth-largest real estate broker by volume in the United States, and has an impressive track record of acquisition-led growth (16 acquisitions). The company also has a top-line CAGR of 23.6% over the last 6 years, much higher than the industry average of 9.1% in the same period. Finally, the company has already begun to see benefits from the monetization of NDAQ share sales in the last two quarters, receiving a total of $268m in payments with a remaining right to receive another 6m shares over 2022 to 2027, which translates into pre-tax proceeds of roughly $87m a year at the current NDAQ share price of $87.43.