Top 25 EC3 brokers - Analysis: Getting the balance right

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Despite markets not changing dramatically, some EC3 brokers recorded notable figures. James Simpson reports on the sector over the past 12 months.

There must have been some measure of relief over the past 12 to 18 months for EC3 brokers with exchange rates being relatively stable and markets not changing dramatically. However, there will not have been many cheers as competition is still very keen and rates are still soft, so financial results have generally been muted. This has not, however, meant that there haven't been some dramatic performances.

There are two new entrants and with two takeovers, HSBC and First City, that allows two newcomers at the bottom of the

Brokerage growth
Looking at the changes in brokerage there have been some spectacular performances, the top two being driven by organic growth with Colemont increasing its headcount by 22 people in 2009 and Berry Palmer & Lyle achieving its 47.7% growth with only a modest increase in employee numbers. AJ Gallagher's growth has come as a result of the acquisition of the First City business — the full impact of this will not be visible in the financial accounts until the 2010 results are published; for the table First City's income has been aggregated with Gallagher's 2009 income.

Other top 10 performers are to be commended for their growth in a tight market but this growth pattern tails off very rapidly outside of the top 10. There have been variable results from exchange gains and losses but we expect this to level out for 2010 — just because exchange rates were more stable did not mean that everyone got it right.

EBITDA growth
There is a fair degree of correlation between brokerage and earnings growth, except for Lockton, which — having been through a restructure — is experiencing the benefits of recovering from a low point in the prior year. Berry Palmer & Lyle come in as the second strongest performer (see graph 2), driving shareholder value by not distributing a disproportionate amount of the profit to staff. Gallagher, Hyperion, Tyser, UIB and Cooper Gay have all moved forward and allowed the top line growth to be reflected in their earnings figures.

Using EBITDA as the measure of profitability reduces the impact of the change in investment markets where interest earnings for all companies has declined dramatically. What was once an important element of a brokers' profitability is now a side show. With a number of the brokers carrying debt following corporate transactions, 10 had negative interest earnings, while eight had interest earnings that were less than 2% of brokerage. Are the days long gone when interest would be more than 5% of brokerage?

EBITDA margin
There are two angles to look at here, one is the absolute margin and the second is its improvement year on year. In terms of absolute margin (see graph 3) the table looks very much the same as previous years except for the entry of Berry Palmer & Lyle into the top 25. It heads the table at 32.7% but the remaining good performers were all there last year. This is why looking at what firms have improved their margins is important as they are the ones that have upped their game.

The improved margin chart looks somewhat different but there are still a reasonable number of the same companies, demonstrating that well managed businesses can always improve and more often than not do (see graph 5). Colemont, at the head of the table, is not a great surprise as it has achieved such a dramatic improvement in the income; the 29% improvement brings its margin up to 12.4%, not quite enough to get into the previous table of best margins but a highly credible performance. Newman Martin & Buchan's improvement of 17.3% was enough to raise its margin to get it into the top 10 best margins, so well done to them.

Companies that can maintain and improve their good margin have significant value as it means that new business generation can make a significant difference to profits and the company does not have to peddle furiously just to stand still.

Employee costs and performance
The major element of all of EC3 brokers' costs is their staff. Without them there is no business, overpay them and there is no profit and potentially a bankrupt business. It is a delicate balance and looking at the top 25 companies some have obviously found ways of making it work.

Rather than look at EBITDA per employee, which would produce a table looking very similar to those above, the analysis looks at the average change in employee cost and the improvement in EBITDA per employee (see graphs 4 and 6).

One would expect that companies that have seen material growth in income would share some of that with the employees but only four out of the top 10 income growth companies (see graph 1) feature in the top 10 largest increases in employee costs (see graph 4). Berry Palmer & Lyle feature at the top of the table, something that it has managed to do or be very near to in most of this year's charts. RK Harrison, Hyperion and Alwen Hough Johnson are the others with only AHJ not featuring in the top 10 by margin (see graph 3). CJ Coleman has entered the change in average cost per employee chart as a result of it topping up its pension scheme, an additional £1.2m being paid in 2009 representing almost 34% of salaries for the year.

Besso, while reducing headcount by 18%, has only managed to reduce staff costs by 3% resulting in a material increase in average cost per head. Lockton having gone through its restructure and seen a significant change in profitability, as seen in the improvement in EBITDA table, has at the same time seen material increase in the cost per employee; its 2010 numbers will be studied to see that the benefits of these changes continue to flow through. THB's employment costs will have been influenced by the acquisition of PWS in 2008, the full impact making itself felt in the 2009 figures.

The second measure focuses on whether employees have really paid for their increased rewards. The correlation with the growth in EBITDA chart is very marked showing that it has been improvement in employee performance rather than just increasing the scale of the business. Lockton's significant turnaround is highlighted by this measure and we will look to see this flow through next year. Gallagher and Berry Palmer & Lyle have both achieved tremendous results and highlight the ability of good businesses to progress even in difficult times.

Last year, despite being described by some as highly competitive and cut throat, has produced some outstanding results, not least from Berry Palmer & Lyle but also some of the larger participants which have demonstrated their powers of recovery. Overall income per employee for the top 25 has risen from £115 000 last year to £133 000 this year — a 15.6% increase. Unfortunately it looks like employment numbers are falling, with Marsh acquiring HSBC a major factor, the top 25 headcount has dropped by 16%.


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James Simpson is a partner at Imas Corporate Advisors

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