After a promising update, there's still some value left.
Financial markets bookmaker IG Group (LSE: IGG) published a trading update on Wednesday ahead of its half-year results for the six months to 30 November due out on 19 January.
I'm in on this one and reviewed it here originally in May at 229p so, at the current price of 353p, they're up 54%. Plus there has been an 11p dividend paid in the period adding a few clicks to the return.
As many readers will know, I love dividends on my value plays. The share was a decently high yielder at its 229p selection here and an even higher one on my purchase price of 202p.
Have we been outed?
The question now is though, has it been outed sufficiently for value investors? First of all, forget the price rise, the test for the continued existence of value is based on current fundamentals, not on any technical analysis of past price action.
The trading update tells us that for the first half, they expect to report revenue of £143m, up about 13% on the corresponding period last year. Interestingly they tell us that this percentage gain is the same both with and without the major acquisition last year of their Japanese subsidiary, FXO, meaning that FXO revenue grew at the same rate as the rest of the business.
"Adjusted" profit before tax is expected at about £77m, up a meaty 32% on last year though they don't explain those adjustments.
When companies refer to adjusted figures, the idea is to omit non-recurring income or expenditure, so as to try and arrive at underlying core business figures, in contrast to the raw accounts which include everything. In practice though, it is often used as a bit of window dressing for the headlines when profits and eps are appear better then than the full accounts reveal.
Bad debts sorted
Anyway, I'd say so far so good. Growth seems attractive, especially so when it is realised that last year's comparative was very strong, as a result of the exceptionally volatile stock market caused by the news of the bank problems breaking. The latter events resulted in substantial bad debt provisions by the company as too many punters made wrong bets which many could not honour.
However, as previously announced, IG Group has tightened up very successfully on credit. The outcome is that in this year's first half, the charge is expected to be less than 0.5% of revenue, against an unacceptably high 12% last year.
New business
IG Group opened 32,000 new accounts in the first half, excluding FXO, which is the same as last year. But again, last year's first half was exceptionally good for new customers, so to maintain the number of new accounts opened in a far more subdued market period is pretty good going.
My guess though is that if the absolute number of new accounts has been constant, then the percentage increase has reduced but that's not really a criticism given the circumstances prevailing last year.
Forecasts
The news for the remainder of the year is a little less encouraging on the cost side, where they expect increased expenditure on staff and marketing. Despite that comment, the directorspeak concludes that:
"The Group's attractive market positions, leading technology, product and geographic diversity leave it well positioned for further growth."
From the talk about increased costs, it is likely that eps may not increase as much as revenue. The current analysts' forecast for the year to 31/05/10 is for eps of 25.5p and a dividend of 15.6p.
For 2011 it is eps of 27.8p and 16.8p. Those figures may possibly be a little on the stingy side but anyway, this gives us P/Es of 13.8 and 12.7 and yields of 4.4% and 4.8%.
These ratios are no longer at the more attractive levels they were at the much lower earlier price at which I first reviewed IG Group, the price having run ahead of the increase in eps and divis.
The trading update gives us no figures but I am assuming IG Group still has a large chunk of cash, which was £99m at the last accounts, being 31/05/09. I referred to this in a previous update of mine in July and it is a nice value feature. I doubt there has been much change in the net tangible assets of the company which are small in relation to the share price and thus not in value territory.
Bottom line then, I'm still in and continue to hold following the update because I think there's more to come. Not as much as there was originally perhaps, but something worth waiting for. And as I've said before, I can't get rid of the niggling feeling that there might be a little corporate action at some stage, though that is completely secondary and never a reason in itself to hold a share.
More from Stephen Bland:
Stephen holds shares in IG Group.
