Stock Pitch - IG Group (LON:IGG)

3rd Dec '20 by Keelan Cooper

33 comments 9420 reads

IG Group was pitched to the Stockopedia Staff Investment Club (SIC) in late July. On 23rd July, shares were purchased for the club at the price of £7.89.

One of the leading leveraged financial instruments providers globally, IG Group, has been on a strong run this year. The company has been a beneficiary of the volatile markets we have experienced over the past year, with greater trading volumes being seen globally.

IG has been a high ranking stock for several years now, due to its excellent all round quality, value and momentum metrics. As a balanced, large cap, super stock, the size & risk diversification offered by IG Group was also considered by the SIC.

In this article, we will assess the factors that contributed to our decision to add IG Group to the SIC portfolio, but also the potential risks/threats that were considered.

Summary

Bull Points - Industry-leading quality characteristics, strong revenue & profitability growth, solid dividend backed by substantial net cash & free cash flow generation, product diversification & international expansion, beneficiary of current market volatility.

Bear Points - Increased regulatory pressures, recent director selling, poor medium-term growth guidance, OTC leveraged product reliance, volatility subsiding after vaccine news.

Profile

IG Group (LON:IGG), a constituent of the FTSE 250, operates within the Investments Services & Investment Banking industry. The company specialises in the provision of leveraged products such as CFDs (Contracts For Difference) and Spread Betting, but also provides traditional brokerage services for purchasing/selling financial instruments.

IG Group is currently classed as a Balanced, Large Cap, Super Stock and trades at a price of 837p per share. Given the 371m shares in issue this equates to a market capitalisation of just over 3.1bn.

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The StockRank scores a near perfect 98 at the time of writing, led by strong Quality and Momentum Ranks of 99 and 98 respectively. The Value Rank stands at 66.

Whilst the company sits on a modest 12m forecast P/E ratio of 14.4, the forecast dividend yield is an enticing 5.16%.

The strong all round attributes of the company means that it currently qualifies for 3 Guru Screens, across Value and Growth investing.

Business & Model

What is the company history…

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Keelan Cooper

8th Dec '20

Hi Wilkonz,

Thank you for your kind words.

I agree that the trading platform is excellent!

Kind regards,

Keelan

Hi Javahart,

I'll make sure to add in a bit about the SIPP. Thank you for this!

Hi mighunter,

Thank you for your thought-provoking comment.

I wasn't aware of the IG platform crash in March & May. It does seem that several platform providers have been experiencing issues in this area. It certainly seems like several have been caught off guard, not being prepared for such periods of heightened volatility and higher trading volumes. Thank you for pointing this out.

I actually covered all 3 companies, Ig Group (LON:IGG), Cmc Markets (LON:CMCX) & Plus500 (LON:PLUS), in a review I did on the Financials Sector back in early July, which you can read here. I'm quite optimistic about each company's prospects overall and I believe the industry offers a good way to take advantage of the current levels of market volatility.

The reason for pitching IG Group over CMC Markets & Plus500 was simply down to risk preference. The SIC portfolio currently has a small-cap leaning and a well-established balanced large-cap seemed like a better proposition for size and risk diversification.

Chris860

15th Dec '20

I assume that you are speaking about Q2 2020 instead of Q1 2021 in the September 2020 release?

Hi Chris860,

IG's financial year runs from May onwards, so the September results were indeed the results for Q1 2021. I have attached the relevant news release below, which confirms this.

https://www.stockopedia.com/sh...

Bluesky Ventura

22nd Jul '21

Great results today.

£iGG see revenues and client base raise by 31% and expected continued growth goinig forward.

BSV

shamusj

Stellar results from Ig Group (LON:IGG) that surpassed the aggressive targets set at the start of the year. The two acquisitions are really paying off, especially Tastytrade (USA listed derivatives and huge video content producer, voted the no.1 broker in the USA by Investor's Business Daily).

I asked a question about regulatory risk today on the IG presentation as an long term holder.

I wanted to know about any incoming financial regulations that they are preparing for. June's answer was that there are some regulations with immaterial impact (Dubai, and Europe) that they are preparing for but that was it.

This is probably my most confident holding over the next year. It thrives on market volatility, excellent growth, expected to be a more diversified business by FY 22 (with less than 80% OTC as opposed to 95% OTC currently), and has such a low opportunity cost of holding with a 5% dividend.

Neil D56

Wouldn't call it a 'bluesky' reaction though........marginally higher on low volume. Guess these results were expected. Technically seems to be in no-mans land as we are a fair way from the highs, which is showing v stiff resistance(960-970, the last 3 peaks)

timarr

The two acquisitions are really paying off, especially Tastytrade

tastytrade had no impact on the results since the acquisition was completed after the year end. Whether it turns out to be a valuable diversifier of earnings or another car crash for a UK company buying in the US remains to be seen.

Hi Shamusj,

For Ig Group (LON:IGG) Volatility no doubt help customer acquisition, and hence a short term spike in revenues for a given quarter, but long term revenues are determined by the active client base and the quality of that client base. As you can see below growth in the active client base tracks revenues pretty well.

So volatility is great for customer acquisition but it is the activity customer base that determines the new revenues base level and future revenues being sustainable for the longer term. I go into more detail in the Multibaggers with 10 Bagger Potential - CMC Markets (CMCX) Sustained growth for longer post. The link is provided below.

https://www.stockopedia.com/co...

The tastytrade revenue for FY 21 is given separately as pro forma in appendix 2 and in my opinion it's well worth the price paid if their growth guidance is to be believed.

Having spoken to some US options traders that I know, the platform is well respected.

"Pro forma FY21 revenue from this portfolio would have been £136.7 million1, of which £100.6
million would have been contributed by tastytrade. We anticipate revenue growth of 25 - 30% per annum
over the medium term for these businesses overall, with tastytrade anticipated to deliver revenue growth
at the higher end of this range. For FY22, we would anticipate tastytrade to be above this range, on an
annualised basis, as the business remains early in its growth lifecycle."

abtan

Ig Group (LON:IGG) (I hold)

I echo the sentiments below regarding the excellent performance.

If there was a negative (and I'm not even sure I would call it one) it was the 21% decline in Q4 (March-May) revenues, but this was to be expected given the the record quarter of market craziness in the same period in 2020 (£260m).

Next year looks even more promising.

FY22 Revenues

Based on today's guidance I'm expecting revenues of of at least c.£1b made up of:

Core Market + revenue to stay flat = £825m as the company says that FY21 pro forma revenues (=£825m) will "moderate" in FY22.
High Potential Markets revenue, of which TastyTrade (TT) is a material constituent, to grow by +30% from FY21 pro forma revenue (£136.7m) = £178m
The company says 25%-30% is a medium term target for TT and they expect growth to be much higher than this in the short term...but I've left total growth at +30% for prudence.

FY22 Costs + Profit

Pro forma operation Expenses are expected to grow by 4%, which would be c£460m.

The above gives me an FY22 Operating Profit target of £542m vs £454m just achieved, which would be some boost.

Given the level of cash generation, the share price doesn't look expensive to me, even considering the regulatory risk clouds forever hanging overhead.

Happy holder for now.

28th Jul '21

It's great to see the Tastytrade CEO invited onto CNBC (more than once) last week. This time to talk about the Robin Hood IPO

https://twitter.com/SquawkCNBC...

16th Sep '21

A great update today confirming my suspicion that the company is very different from its peer Cmc Markets (LON:CMCX) who recently reduced investor’s expectations.

Revenue up, client numbers up.

gus 1065

Morning shamusj.

Not sure I’d describe this as a “great update” from Ig Group (LON:IGG) - they seem to be seeing the same softening of client trading activity as Cmc Markets (LON:CMCX) and they’re not exactly effusive about the level of expected future activity. That said, I’d agree it is ahead of what might have been feared after the Cmc Markets (LON:CMCX) trading update a few weeks ago so hopefully a collective sigh of relief when the markets open and no further damage to the share price.

Gus.

The context regarding it's peers is what prompted the word "great". Everything is opportunity cost in the markets, so for anyone invested in this sector, it was a great update.

Surrey Steve

I would agree that the update today was reassuring.

The tastytrade acquisition appears to be delivering. Without this client gains have reduced and average spend per client in the quarter has fallen, but this was expected given the elevated levels seen since the beginnings of the pandemic. I see the fact that they are still adding net new clients as a positive.

Overall appears on track to hit the forecasts for this financial year, but still early days.

I hold Ig Group (LON:IGG) but sold out of Cmc Markets (LON:CMCX) following its profits warning. Generally, I would say that IGG management are much less effusive than the team at CMCX.

Overall, Ig Group (LON:IGG) still seems good value and hopefully we will see the dividend increase further following the capital review being undertaken this year.

doug2500

21st Dec '21

Ig Group (LON:IGG) has put out a trading update every december, usually around the 5th but a bit later last year. So far there's nothing this year.

Do people think there's any reason to read anything into this? Is the business more complex and it takes longer? Or are financial controls slipping and it takes longer?

Or is it just a nothing and we just need to be patient?

I have a recollection that they said that they were changing the cadence of investor updates earlier this year. Checking the 16 September Q1 Revenue Update they state "The Group's next market announcement will be its half year FY22 results, to be released in January 2022.".

I'm hoping that we just need to be patient!

Ponzy Mad-Hoff

20th May '22

Been watching IG group (LON:IGG) for while and finally jumped in after taking profits on SAAB. Non-exec Jonathan Moulds (former Barclays COO) just bought £700k yesterday. Looks cheap to me and benefits from market volatility. Nice divi too.

Stock Pitch - IG Group (LON:IGG)

Summary

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Business & Model

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Keelan Cooper

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