IG Group has been in the wars for almost three years (Patrick Hosking writes). Regulatory crackdowns and long periods of market calm, when punters find more interesting things to do than bet on finance, have made for a torrid time for Britain’s biggest spread betting firm.
Yesterday, though, June Felix, chief executive for the past seven months, at last had some better news for shareholders. First, customers have got their betting juices flowing again, thanks to a recent pick-up in the volatility of markets, largely triggered by the worsening trade war between the United States and China. Net trading revenue for the quarter to May is expected to be £115 millon — a promising increase on the £108 million in the previous quarter and far better than the market’s worst expectations.
Second, Ms Felix, 62, has some persuasive ideas about how to boost returns from overseas territories untouched by events in the European Union. New rules on leverage designed to protect novice punters have seriously hit revenues here. However, Ms Felix struck a buoyant tone in strategic presentations to investors yesterday, relishing the challenge of expanding into other markets.
Take Japan, which boasts two million financial punters and a £1 billion market, five times bigger than that of the UK, but where IG has a market share of just 2 per cent. It’s been in the country for 15 years but has barely made a dent, possibly because it has tried to plonk a British template on a very different market. Now it is hiring a local Japanese boss, designing bespoke systems and establishing partnerships with Japanese banks. Already it seems to be making a difference, with new customers up by 80 per cent in the past year.
Or take Hong Kong, the world’s fourth largest online trading market, where, again, IG punches well below its weight. Ms Felix, an American of Chinese ethnicity who speaks Cantonese, can see great promise there, too. She also sees expansion prospects in the US and overall has set herself a target of boosting revenues from these new territories from £60 million to £160 million in three years.
Third, the dividend is safe for now. IG is promising to maintain the total payout at 43.2p until group profits start to grow sufficiently to raise it. Some had feared that the payment might have to be cut in the wake of a fall in operating profits for the year to May to a probable £190 million, from £228 million last time.
The triple dose of good news boosted the shares by 59½p, or 12.5 per cent, to 534¼p. Even at this level, they yield 8 per cent and trade on a multiple of 13 times current year profits. That looks undemanding if you believe in those growth hopes.
Spread betting has lost its appeal with investors. This is an industry where the bookies are required to tell prospective punters just how likely they are to lose their shirts. The British website for IG has the sombre message that 76 per cent of its customers lose money. Investor sentiment has been soured still further by a huge profit warning from Plus500, a rival, in February.
And while they normally welcome market volatility, firms don’t like too much of it. When the Swiss franc peg with the euro was abandoned unexpectedly in 2015, the shock cost them millions because their customers couldn’t afford to meet their margin calls.
However, a lot of the downside to this racy industry is already in the share price. IG has largely weathered the hit from European regulators and sees revenues in Europe as stabilising and soon starting to grow again, albeit slowly. If it can deliver even half of its new market ambitions, the shares look oversold.
ADVICE Buy
WHY Growth prospects overseas are promising, while anxieties about regulation are well discounted.
C&C Group
In the past, the performance of C&C Group sometimes has been enough to drive shareholders to drink (Dominic Walsh writes). The Bulmers cider and Tennent’s lager maker, which also distributes wine, spirits and soft drinks, always did pretty well in its main Irish and Scottish markets, but getting its products into pubs and bars — the so-called on-trade — south of the border was a challenge.
According to Stephen Glancey, C&C’s chief executive, the acquisition just over a year ago of Matthew Clark and Bibendum, the drinks distributors, from the ashes of Conviviality “changes this dynamic”. He said that the deal meant C&C was now “the largest final-mile distributor to the on-trade of alcohol and other drinks in the British Isles”.
Acquiring Matthew Clark was a case of second time lucky, as C&C had been among the underbidders when Conviviality bought it in 2015, albeit a long way behind the winning bid of £200 million. C&C paid a token £1 and assumed £102 million of debt to rescue it from administration, although it has since taken out £26 million of cash and expects to take out another £20 million-plus this year. The task of turning around Matthew Clark and Bibendum has been made easier by bringing back former management. Their knowledge of the businesses has enabled C&C to deal swiftly with the “severe financial and operational stress” that they had been operating under.
The acquisitions boosted C&C’s full-year revenues by 188 per cent to €1.57 billion — an organic increase of 3.2 per cent — while adjusted underlying earnings rose by 1.4 per cent to €120 million. Although the weather boosted sales of Tennent’s and Bulmers, which is sold under the Magners brand in Britain, the group has become much less dependent on the sun and its strong cashflow should give it the resources to reduce debt, invest in the business, seek deals and return cash to investors.
Its Woodchuck cider business in America looks like a distraction and could be sold, although analysts believe that the endgame could be a sale of C&C itself to Anheuser-Busch Inbev, with which it has several distribution deals.
ADVICE Buy
WHY 2020 target of double-digit earnings growth and strong cash are attractive.
