Knight shares jump; analysts see discount to book value
Knight Capital Group Inc (KCG.N) shares jumped almost 4 percent on Tuesday, as the embattled market maker began to regain some of its share volume as a market maker before a software glitch caused a huge trading loss last week.
Knight secured a $400 million rescue from a consortium of investors that allowed it to keep its doors open on Monday. The investor group will now own 73 percent of the equities market maker.
In the days after Knight’s $440 million trading loss, customers deserted the firm, causing volumes to plunge. Those volumes are now steadily recovering.
Knight has been the largest U.S. provider of retail market-making in New York Stock Exchange and Nasdaq-listed stocks, buying and selling shares for clients.
As a market maker, it also provides liquidity to equity markets by stepping in to buy and sell stocks, using its own capital to ensure orderly activity.
Knight’s share of volume in the Nasdaq 100 tracking ETF (QQQ.O) was 20 percent at noon Tuesday, according to Thomson Reuters AutEx data, above its usual average of 13.3 percent.
In other heavily traded stocks, Knight was handling more volume than in the last few days, but volumes in all names had not reached its levels from before the August 1 snafu, according to those figures.
Knight’s shares were up 3.9 percent at $3.19 in afternoon trade. The stock had traded above $10 one week ago and hit a low of $2.27 on August 2, the day after its technology glitch roiled trade on Wall Street.
SAVED BUT AT WHAT COST?
Jefferies Group Inc (JEF.N) led the investment to save Knight, which included Blackstone Group LP (BX.N), rival market maker Getco and financial services companies TD Ameritrade Holding Corp (AMTD.N), Stifel Nicolaus (SF.N) and Stephens.
Jefferies got the biggest piece of the pie, with shares that will represent a 22.8 percent stake in Knight. Blackstone and Getco will each hold a 16 percent stake, TD Ameritrade will hold 7.3 percent, and Stifel and Stephens each get 5.5 percent.
For other investors, the question is how much Knight is actually worth, given its current circumstances. KBW analyst Niamh Alexander assigned a new price target that is 75 percent of tangible book value; before the loss, Knight traded at 90 percent of book.
“We use a higher discount to (book) than historically to reflect the higher risk profile of the earnings after now two consecutive months of outsized trading losses, and as well as the liquidity and dilution and risk of shareholder lawsuits,” Alexander said in a note on Tuesday.
Barclays Capital analyst Roger Freeman, in a note on Monday, also suggested that a valuation around 75 percent of tangible book value was reasonable in light of Knight’s situation.
Knight Chief Executive Officer Thomas “TJ” Joyce said on Monday that the firm would look at its business units over the next few months and decide whether all of the parts should remain in place.
JPMorgan analysts have suggested that investors will look at Knight only as the sum of its parts, in expectation of an eventual breakup. Among the most attractive assets are foreign exchange platform Hotspot FX and Urban Financial, the second-largest reverse mortgage lender in the United States.
Sandler O’Neill analyst Richard Repetto, in a note Tuesday, estimated that Hotspot FX alone could sell for $155 million. Sandler O’Neill advised Knight on its capital raise.
Source: (Reporting by Ben Berkowitz in Boston; Editing by Lisa Von Ahn and Leslie Adler)