IG Group places big US bet

A strong set of interim results for IG Group (IGG) were trumped by news of the investment platform’s proposed acquisition of fast-growing US online brokerage tastytrade, in a $1bn (£733m) deal funded by $300m in cash and the issue of 61m new shares.

Founded in 2011, tastytrade comprises two entities: a financial education network with an audience of just under a million “knowledgeable” traders, and a fast-growing online options and futures brokerage in the world’s largest derivatives market.

As is standard practice, IG shareholders have been assured the transaction will prove accretive to earnings per share – albeit by low single digits and on an adjusted basis – in the first full year post-completion. The company points to minimal risks associated with integration, client attrition and absence of cost synergy targets as sources of optimism.

Numis saw this is as reason to lift its adjusted earnings expectations to 63.7p per share for the year to May 2022, though FY2021’s forecast was held at 72.3p. Some investors will require more convincing, judging by the muted immediate market reaction to the deal.

One concern could be valuation. IG is paying just over 20 times’ tastytrade’s pro-forma pre-tax profits for 2020, a banner year for client activity but one in which the pre-tax margin also slipped from 57 to 42 per cent. By contrast, IG trades on less than eight times’ trailing pre-tax profits for the 12 months to November, while margins climbed to 55 per cent for the half-year period, up from 40 per cent the prior year.

Having canvassed plenty of opinion, chief executive June Felix told us she is convinced IG is buying into a long-term secular shift toward self-directed trading, rather than a Covid-inflated bubble. “This is not Robinhood, this is a deal focused on customers who know what they’re doing,” she said.

Nevertheless, wherever retail-focused derivatives platforms go, twitchy regulators are never far behind. What assurance does IG have that tighter market oversight is not coming, particularly with the incoming Securities Exchange Commission chairman Gary Gensler yet to lay out his priorities?

“No-one can predict regulation,” acknowledged Ms Felix. “But this is a well-established, well-regulated business today. There’s much more understanding of equities markets [in the US], of which options and futures are a sub-set.”

Shareholders can at least take comfort from a proactive attitude toward the UK financial watchdog, which last week warned cryptocurrency investors should be prepared to lose all of their money. IG says it is winding down its crypto products and positions here.

The recent bitcoin price rally has nonetheless been good news for IG, whose crypto asset holdings tripled in value in the six months to November, to £66.9m. Some of that was due to increased hedge positions in markets, such as Japan, where the trading of cryptocurrencies and their derivatives is more tolerated.

All of which feels like further vindication of IG’s international push, and a sign that the trajectory is towards growth, however volatile. Speculative buy.

Last IC View: Hold, 816p, 23 Nov 2020