Back in December last year, spread better IG Group's (IGG) chief executive, Tim Howkins, pointed out that if the low levels of volatility seen in the first half were repeated in the second half, then revenue for the full year would be down in the region of 7 per cent. It was always going to be a big ask to match the hectic trading environment seen for much of the previous year, hence the forecast fall in profits for this year. However, volatility levels in the second half have actually shown a distinct increase, with the banking crisis in Cyprus and the sharp fall in gold and silver alone stimulating greater levels of customer activity. And there are plenty of other uncertainties, from the US fiscal cliff to the downgrading of UK debt, to suggest the volatility that largely determines trading conditions for IG may persist. So after the longest sustained period of low volatility for over five years, activity levels are starting to look up and now could prove a great time to buy into the company's enticing growth story.
- Attractive yield
- Net cash
- Strong start to second half
- Dominant market position
- Volatility levels could fall
- Regulatory constraints
IG's revenue in the third quarter to March rose by 18 per cent to £88.6m, albeit against a weak quarter the year before. Crucially, two key performance metrics – client numbers and revenue per client – have provided further encouragement. Client numbers in Europe and the rest of the world outside the UK and Australia rose by 14 per cent and 20 per cent, respectively, in the third quarter.
And while customer numbers were marginally lower in the UK and Australia, this was more than offset by double-digit growth in revenue per client. Even the troubled Japanese operation is showing signs of recovery. Trading here was hit badly after the regulatory authorities reduced leverage limits, the last restriction coming in during August 2011. Since then, IG has concentrated on recruiting higher-value clients, so while the number of active clients fell 4 per cent in the third quarter, revenue per client was up 16 per cent. The UK remains the group's biggest market, accounting for 52 per cent of 2012 trading revenue and 57 per cent of cash profit.
| IG GROUP (IGG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 531p | MARKET VALUE: | £1.94bn | |
| TOUCH: | 530-532p | 12-MONTH HIGH: | 572p | LOW: 413p |
| DIVIDEND YIELD: | 4.5% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 122p | NET CASH: | £108m | |
| Year to May 31 | Trading revenue (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 299 | 101 | 28.2 | 18.5 |
| 2011 | 313 | 12.5 | -5.66 | 20.0 |
| 2012 | 367 | 186 | 37.9 | 22.5 |
| 2013* | 352 | 178 | 35.7 | 22.5 |
| 2014* | 379 | 199 | 40.5 | 24.1 |
| % change | +8 | +12 | +13 | +7 |
Normal market size: 5,000 Matched bargain trading Beta: 1.03 *Numis Securities, underlying forecasts not comparable with prior periods | ||||
The beauty of IG's business model is that the company doesn't carry the risk associated with the bets placed by clients. Net exposure to the market is hedged out, leaving the company to simply pocket the spread between the buying price and the selling price plus any other charges. Clients are required to deposit a margin to cover any losses on an open position and, if the margin is used up, the position is closed out. This protects the client from running up further losses and eliminates IG's exposure to bad debt.
IG also continues to grab a larger share of the market and now has a 44 per cent share of the UK spread betting market and over a third of the Australian contracts for difference (CFD) market, although the focus remains on driving up its share of active traders and therefore its share of total revenue. Steps have also been taken to enhance the trading platform by introducing a mobile application in all the countries in which it operates. And this is already starting to pay off, with a growing number of client trades and account openings coming through mobile phones.
