IG diversification strategy starts to bear fruit

Trading volumes at IG Group (IGG) have been up and down recently as many of the day traders who lost money last year closed accounts and moved on. This was reflected in the fall in active users during the half – these were marginally lower at 312,000, although the comparators are awkward as they reflect record activity for trading last year. Analysts did highlight the impact this might have on IG’s over-the-counter trading business this year, though – beyond the corporate actions that the company has already taken, it is how its remaining, generally professional, traders approach the year that will determine its performance. The main question is how a business that operates on a low fixed cost and capital base can expand organically within a reasonable timeframe.

Management’s answer is to double down on new markets in the US and Japan, with both countries home to large numbers of active traders. What IG calls high-potential markets generated revenue growth of 28 per cent, on a pro-forma basis, to £94.8mn. That compares favourably with the more sedate 6 per cent growth in its mature core markets business where revenues touched £424mn. There are some signs that the effort to change the business mix is starting to bear fruit, particularly with non-OTC product sales making up 19 per cent of total revenues – a rise of 3 percentage points compared with this time last year. Ultimately, the aim is that IG can smooth out the trading fluctuations that are dependent on the state of the economy and markets.

It was also notable that a hawkish approach to interest rates is contributing to the better income mix. For example, interest earned on client deposits was over £24mn and makes up approximately 5 per cent of total revenues – a hugely material amount given that IG also earns fees when the funds are traded.

Management’s guidance is basically unchanged at mid-single-digit cost growth (costs tend to be weighted to the second half as staff remuneration is assessed and booked) with an operating profit margin for the year in the mid-40 per cent range. Analysts have drawn attention to lower activity, particularly for Tastytrade, but IG has always been a cash-generative business and the current of nine times Jefferies’ Securities earnings per share (EPS) forecast for 2023 of 92p a share means the value case remains intact for a business with a low fixed cost base. Buy.

Last IC view: Buy, 745p, 21 Jul 2022