- IG delivers impressive growth despite quieter trading conditions
- Performance of latest acquisition, tastytrade, ahead of forecasts
The lingering doubts over IG Group’s (IGG) strategic direction were answered to some extent in these results, after the trading platform provider enjoyed a stronger than expected contribution from its recently acquired US brokerage and derivatives trading business, tastytrade.
Thanks to tastytrade, adjusted net revenue was 14 per cent higher in the first half, compared with 2020. However, strip out the impact of the acquisition and overall revenues grew by only 1 per cent, mainly because of softer trading conditions and lower market volatility. Adjusted first-half earnings per share were broadly flat at 50.6p, but were substantially ahead of broker Numis’s forecast of 38.5p.
IG’s revenues have ballooned in the past couple of years and are 92 per cent higher in the first half of 2022 than before the pandemic struck. Active clients have grown by 124 per cent and, encouragingly for the firm’s bottom line, over-the-counter (OTC) leveraged revenues per client have stayed elevated over the past year, even though markets were less choppy. At the same time, its business mix has started to change: around 84 per cent of the group’s revenues now come from OTC leverage products, a noticeable diversification from almost 100 per cent a few years ago.
The expansion of the group hasled to this more diversified revenue mix, which should help IG’s long-term prospects. For example, exceptional growth in Japanese client numbers meant that IG now generates 38 per cent of its revenue from the Asia Pacific region. In addition, any rate rises this year should also help the group as the balance sheet disclosed a decent cash pile of £664m.
But it was not all plain sailing. While a spike in market volatility so far this year should help earnings, it has proved difficult for exceptional growth to be sustained during calmer periods. While the group did well to grow the number of clients in its stock trading and investments arm by 30 per cent, the yield per client fell by a fifth in the first half as a result of quieter trading. Meanwhile, revenues in Australia fell as new regulations were brought in to restrict leveraged trading, and tighter regulation could be a potential threat down the line, if implemented in other jurisdictions.
Nor is it all good news on the tastytrade front. IG previously had to reduce its growth forecast for tastytrade following the delay of its launch in Canada, while some fear that the acquisition itself was overpriced. James Harries, manager of Troy Trojan Global Income Fund (GB00BD82KQ40), sold the stock on the news last year commenting: “We fear that this may turn out to be the wrong asset, bought at the wrong price, at the wrong time”. While recent results are good, it’s still early days for IG's venture into the North American market.
Still, brokers have been revising up their earnings forecasts for the next couple of years. The shares trade on forward PE ratio for 2022 of 12.2, falling to 10 for 2023, according to broker Peel Hunt. That looks like relative good value as IG tends to thrive as markets dive. Buy.
Last IC View: Buy, 865p, 22 Jul 2021
|IG GROUP (IGG)|
|ORD PRICE:||862p||MARKET VALUE:||£3.7bn|
|TOUCH:||859-863p||12-MONTH HIGH:||960p||LOW: 735p|
|DIVIDEND YIELD:||5.0%||PE RATIO:||9|
|NET ASSET VALUE:||403p*||NET CASH:||£338m|
|Half-year to 30 Nov||Net Operating Income (£m)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £883m, or 205p a share|