IG looks a solid bet

Equity markets have taken a beating over the past 18 months, but this has done little to discourage punters from continuing to gamble on how shares will perform. In fact, increased levels of market volatility have provided greater opportunities to profit from the sharp movements in equities.

Operating as an online betting specialist, IG has been a happy beneficiary of this renewed interest. New accounts opened in the six months to the end of November numbered 36,000 compared with just 19,000 a year earlier. And the trend has continued, with 18,700 new accounts opened in the three months to the end of February. This includes 4,400 from FXOnline Japan, which was acquired in October, and was formerly a privately owned foreign-exchange trading company. IG has also broadened its revenue stream by opening an operation in Chicago through its IG Markets subsidiary, offering US clients online trading on spot foreign exchange, options, metals and so-called binary options. A binary option is a new product to US traders and allows speculators to take a simple position on market trends.

Clients failing to meet their debt obligations are part of any betting business and IG acquired its fair share of doubtful debts as a result of the frenzied trading in financial markets last autumn. Since then however, management has adopted a tougher approach towards managing credit risk. In some cases, margin rates have been increased, but the big difference is that a vast majority of clients' positions on margin calls are now closed out before they get into substantial deficit. This is good for IG and also for clients, because it saves them from running up debts that they can't handle. The benefits have been quick to show through and a charge on doubtful debts - equivalent to 11.6 per cent of turnover in the first half of 2008-09 - has been reduced in the third quarter to less than 3 per cent and most of these were incurred before the tighter rules were applied. Naturally, there has been a downside - business levels have been hit because some customers, notably those with large, long-term, single-stock positions, are now actively discouraged.

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UK spread betting accounted for 46 per cent of the group's revenue in the first half of the year and grew by 34 per cent from a year earlier, thanks to the effect of lots of new clients. However, clients are becoming increasingly accustomed to the higher levels of market volatility and management reckons that, while business will remain strong in the second half, it may be difficult to beat the exceptional performance seen last year. Evidence of this is already coming through, with third quarter turnover in the UK easing back from £34m a year earlier to £31.5m, with a similar trend in the Australian business, where turnover fell from £6.9m to £6.4m.

However, strong growth in the group's newer outlets in Singapore, France, Germany, Spain, Italy and now the US is more than making up for the slower pace in the UK and Australia. In the first half of the year, turnover from these six countries jumped by 600 per cent to £18.3m, while turnover in the third quarter rose from £2.8m a year earlier to £11.3m. So, including a first-time contribution from FXOnline, turnover in the third quarter rose from £46m to £62m.

IG's business generates lots of cash. True, the net cash figure in our table flatters its position because it includes £309m of cash held on behalf of clients. Even so, take that away and IG was still left with £96m net cash at the end of November. Also, while there will be a fall in interest earned as a result of the sharp drop in UK interest rates, the effect on profits should be offset by sterling's continued weakness, a significant factor now that around half the group's revenue is generated from clients outside the UK. Meanwhile, the sports betting side of the business now accounts for only 3 per cent of turnover and there are plans to relaunch the sports website in the second half of the year.

As well as evaluating new markets in which to operate, IG is introducing new products and trading platforms. For example, starting in Australia, it plans to launch a platform offering direct access to markets to be called PureDMA.