The definition of volatility (it has many) relevant to IG Group is "tending to vary often or widely" because that's how it refers to financial markets instruments such as equities, commodities and currencies. Volatility means spread-betters become especially confident that they can make a quick profit and, through using leverage, without having to put up much money of their own. And volatility is the friend of IG because it provides the means for punters to place bets over the telephone or online and, more recently, by rolling out 'apps' to enable them to bet via their mobile telephones.
The attraction of spread betting is that clients can use leverage to increase the size of the bet without having to commit too much capital. This also means that clients can rack up losses quickly if they fail to close out a losing position. This started to get expensive for IG a few years ago, and bad debt charges began to mount. Today, bad debts have virtually disappeared because, once the margin put up by a client is eaten away, the position is automatically closed. This prevents the client from losing more than the margin and protects IG, too. Besides IG does not seek to take positions itself. It gets its income from the spread between the buying price and the selling price on the contracts it arranges between clients.
So turnover really depends on how active financial markets are. There were dull months like April when too many folks were pre-occupied with the UK's extended bank holidays, but business in the new financial year has taken off. And IG couldn't wait for the planned interim management statement due on 13 September to announce how strong the business levels are. At the end of August, it felt compelled to announce that client activity has jumped to record levels, motivated by the sharp swings in financial markets. IG expects revenue to have jumped by 19 per cent to £94m in the three months to the end of August. And, given the uncertain outlook for the global economy and worries about sovereign debt, the pieces are in place for sustained volatility.
| IG GROUP (IGG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 441p | MARKET VALUE: | £1.60bn | |
| TOUCH: | 440-441p | 12-MONTH HIGH: | 560p | LOW: 379p |
| DIVIDEND YIELD: | 5.0% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 105p | NET CASH: | £125m | |
| Year to 31 May | Revenue (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 184 | 97 | 20.6 | 12.0 |
| 2009 | 257 | 111 | 22.4 | 15.0 |
| 2010 | 299 | 140 | 28.2 | 18.5 |
| 2011 | 320 | 7.0 | -7.1 | 20.0 |
| 2012* | 349 | 193 | 38.4 | 22.0 |
| % change | +9 | see text | see text | +10 |
Normal market size: 10,000 Matched bargain trading Beta: 1.0 *Numis estimates | ||||
Just over half of group income originates in the UK, and IG has spent time and money improving the range of applications that customers can use to place bets, as well as investing in technology to provide a faster and more efficient service. This is already paying off, with nearly all internet transactions processed automatically and, in peak trading, IG has been processing nearly 350 orders per second. It is important to attract new clients because, although the year to May saw an 8 per cent rise in UK client numbers, there was a 5 per cent fall in revenue per client.
Trading outside the UK has included some awkward spots, however. IG's Japanese operation was affected by the Fukushima disaster in March, but conditions were deteriorating before then because the Japanese authorities capped the amount of leverage that clients could use. Not only did this have a predictable effect on net operating income, it also obliged IG to provide an impairment review that resulted in a one-off writedown totalling £143m. Without that, pre-tax profits last year would have been £163m and earnings per share 32.6p. But the charge was a non-cash cost that has no impact on IG's regulatory capital or its dividend paying capacity. And, with further restrictions due to be implemented at the start of next year, steps have also been taken to make cuts in the cost base.
Further pruning has resulted in the closure of the sports business, extrabet. IG couldn't find a buyer on acceptable terms, so it sold the client list to Spreadex, resulting in £2.5m of cash costs and a £5.3m goodwill writedown. That, however, will have a minimal effect on IG's balance sheet, which is still strong, with £125m-worth of cash and no debt.
