Here’s one company that is cashing in on the current financial situation and looks set to grow further thanks to a canny purchase in Japan.
In turbulent times, companies that can continue to grow their profits are in short supply. One firm that’s doing extremely well however is the spread betting outfit IG Group (LSE: IGG). Put simply, the more volatile the financial markets are, the more its clients trade and the more money it makes.
IG was founded in 1974 by Stuart Wheeler, a few decades before spread betting and contracts for differences became mass market. It initially took bets on the gold price, the IG standing for Investors Gold. The company floated in 2000 but was bought by a private equity firm in 2003. It then re-floated in 2005 at 120p. Unlike many private equity new issues, the shares have done extremely well. They’re currently 310p, down from a high of just over £4 around this time last year.
Bumper sales growth and bumper margins
IG’s financial performance has been highly impressive. Over the last 10 years, sales have grown at an average rate of 41% and profit growth has been even better. In the year ended 31 May 2008, IG made a pre-tax profit of £97m on sales of £184m, so its profit margins are in excess of 50%. Earnings per share of 20.6p mean the company is trading at 15 times past profits.
Forecasts for the next two years are for earnings per share to hit 25p and then 28.6p. First-quarter sales growth was 29% so the former of these two forecasts certainly looks achievable. On just over 12 times earnings for its current financial year, the shares don’t look overly expensive.
IG has also been pretty generous with its dividends in recent times. Next year’s predicted payout is 15p which is a dividend yield just shy of 5%.
Even better news is that the company hasn’t relied on debt to finance its growth. Its cash balance at the end of last year was just less than £500m, almost half of its current market value. However, once you adjust for money owed to clients, the net working capital position falls to a still-healthy £150m. The company also has bank facilities of £200m to deal with working capital movements.
The short selling ban
Short selling has hit the headlines recently with increased disclosure rules and a ban on betting against certain financial companies. As Maynard Paton pointed out on his blog last week this shouldn’t have much of an impact on IG. Only 0.3% of its revenue in the last quarter came from clients shorting the ‘banned’ financial companies. Indeed this month has seen record client openings and transactions and IG has not suffered any material losses due to the recent high profile bail outs, failures and mergers.
The behaviour of IG’s customers with respect to financial shares is a little unexpected. Betting on shares is the most popular pastime among its clients, accounting for 35% of revenues. Indices, such as the FTSE 100, are close behind with 33% followed by currencies at 15% with other items such as commodities and sports betting making up the remainder. In most asset classes, there is a mixture of bets in both directions but for shares clients predominantly bet on prices rising. Perhaps this indicates the overly hopeful nature of share investors!
Big in Japan
At the moment around 30% of IG’s revenue comes from overseas. It set up in Australia in 2002, then Singapore, Germany and Italy in 2006, France and Spain in 2007 and the US earlier this year.
It has now announced a move into Japan buying an 87.5% stake in FXOnline, a six-year old foreign currency business. James Gow, the UK ex-pat who set up the firm, retains the other 12.5% although IG has an option to buy this at a price depending on future financial performance.
The profit margins of FXOnline, at 70%, put IG’s to shame. The price of £112m converts to a price earnings multiple of 8.7 times based on last year’s post-tax profits of 3 billion yen. Although there was a slowdown in trading at FXOnline in April and May of this year, due to price cuts from rival firms, it’s since picked up again with September looking particularly strong.
IG sees an opportunity to launch contract for difference products in Japan in as little as four months, subject to regulatory approval. There are few competing products and a strong private investor presence on the Tokyo stock exchange, both of which bode well for this plan.
To fund the acquisition IG placed £82m of new shares at 295p with the balance coming from its own cash resources. The enlarged business will have around 40% of its business coming from overseas and the acquisition is expected to boost IG’s earnings per share figure for this year.
All in all, this purchase looks like a sensible, well-timed move and the company has retained its comfortable net cash position. There is a potential threat in that a politically led City backlash could hamper IG’s growth prospects. Nevertheless, if you’re looking for a share that can prosper over the next few years, IG is certainly worthy of inspection.
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