The company's recent update underlines its value credentials.
IG Group Holdings (LSE: IGG), the financial markets bookmaker which I reviewed here a few weeks ago, has just announced an update for their year ended 31 May 2009, prior to the full results being published on 21 July.
I bought a small holding in these shares earlier this year at a price including costs of about 202p. I saw them as a decent value play in many respects, though not the full monty because of the absence of a price/book ratio of under 1. In fact, book to tangible assets is around 9. This is vast by value standards -- vast in this case meaning unattractive. But the other fundamentals stacked up for me quite nicely, so I thought it worth investing. I didn't bet the whole farm though, just a shovelful of a manure heap in the corner of a field.
Sales and profits up
The data in the update reveals that revenue was up to £257m compared with £184m in the previous year -- an increase of about 40%. However, 2009 includes a Japanese acquisition known as FX Online Japan which contributed eight months revenue. Excluding that, internal revenue growth showed an increase of 25%.
Adjusted profit before tax rose to £125m from £97m, a gain of some 29%. Unlike for revenue growth, they don't say though what the internal profit growth figures would be when excluding any contribution from FXO.
This adjusted profit figure excludes the amortisation of intangible assets that were recognised at the time of the FXO acquisition. These amounted to some £42m and they are being written off over five years. The earnings per share (eps) figure that will published when the full results are released in July will include this amortisation, so I suspect the increase in eps will be less than the 29% for adjusted profits.
In fact there have been a couple of problems announced previously with the FXO acquisition. These are to do with price cutting competition in Japan and also a legal limit being imposed on the maximum leverage permitted to punters, presumably as a result of the financial crisis.
The enemy of value
Long-time readers of my value stuff will know that I regard acquisition in general as the enemy of value and foreign acquisition in particular as the fiscal manifestation of the devil. This is because I have observed far too many failed ventures over many years by over ambitious British companies thinking they might profit from overseas expansion.
I'm not saying it never works, just that it is often highly questionable and a potential value destroyer. It may or may not be coincidental that FXO seems to have run into a few problems shortly after being acquired.
There's often the feeling for me with overseas acquisitions that the locals are taking advantage of mug foreigners paying inflated prices for businesses. However, IG Group was already highly international with offices all over the place. So I didn't think that the FXO purchase in Japan, a country notoriously difficult for outsiders to succeed in, was likely to result in hara-kiri for the company though it might cause a slight scratch.
Actually, the publicised difficulties may have previously helped to depress the share price. Now, they are doing something about it and spreads have been changed to meet the competition. As for the new leverage limit, they don't know the impact this may have but in any case it won't apply for at least a year and will affect all Japanese firms in this business.
The other slightly negative aspect mentioned in the update is that volatility is very good for encouraging betting on many financial markets. It's not the direction of markets that these gamblers care about, but about how much movement there is in a given period. But the recent decline in volatility in many areas will make the first half of the current year (i.e. to 31 May 2010) "challenging" given the exceptional levels seen in the same period last year.
Good news on bad debts
There is good news though on the problem of substantial doubtful debts. This hit IG Group towards the end of last year at which point the share price fell to what turned out to be, and still is, a twelve month low of 166p.
They say in the update that they have been successful in reducing this cost to the extent that the charge in the second half of the year is expected to be below 3% of revenue, compared with an unacceptably high 12% in the first half. Moreover, the majority of the charge in the second half was due to legacies of positions taken out by customers before their new tighter credit control approach, which implies that the doubtful debts proportion should be even lower in future.
The news is very good too on the number of customer accounts with a monster increase of 74,000, being 76%, in new accounts. This includes FXO but there was still a very large 45% increase on a like-for-like basis. They consider this measure "a key lead indicator of the future prospects of the business." This leaves them the "well positioned for further growth."
The good news here in my opinion far outweighs the poor. As I write, the shares have risen strongly to about 239p and I continue to hold because I believe there is further to go with this play. With a forecast dividend of 13.3p, it's still yielding about 5.5%.
> Stephen owns shares in IG Group. It is also a Champion Shares pick.
