Disclaimer: This newsletter is not financial advice this is for educational purposes only so please DON’T take this newsletter as a buy or sell signal.
IG Group Holding PLC Fundamentals:
Below is a table I normally use in my process when looking at the health of a company to see if they pass the screening test. If the company meets my criteria it will be colour-coded in green and if the company fails to meet my criteria it will be colour-coded in red which means we need to investigate further and ask ourselves why this is the case. As you can see below we have 2 red boxes and I am going to explain each one.
Shares Outstanding- When looking at a company I ideally want the company to decrease their shares or keep shares the same. As you can see IG Group’s shares outstanding have gone up in the last 5 years with a majority of that increase happening in 2022. The reason for this sudden increase in shares is that IG Group acquired a company called TastyTrade where IG Group had to pay $300 Million in cash and they issued 61,000,000 new ordinary shares to fund this purchase. Even though their share count has significantly increased, IG Group is correcting this as they have authorised a £150 million share repurchase programme which ends in 2023. JP Morgan will repurchase IG Group’s shares on their behalf.
Debt To Equity Ratio- When looking at a company, I ideally want its debt to decrease over time because when a company has low debt, it would be very hard for them to go bankrupt. As you can see IG Group’s debt-to-equity ratio has increased from 0.12 to 0.16. I am not worried about this in the slightest because IG Group can afford to take on a bit of debt to fund day-to-day operations as they have £1.2 Billion of cash & equivalents on the balance sheet which covers their £297 million debt.
Business Overview:
Founded in 1974 by Stuart Wheeler, IG Group is an online trading provider that offers access to spread betting and CFD trading in over 17,000 investment markets. Originally founded as a spread betting business under the name IG Index(Investors Gold Index), IG Group allows its customers to trade gold prices as an index instead of buying the physical commodity.
Headquartered In London, England IG Group is regulated by the FCA, the UK's financial authority body who is responsible for regulating 50,000 firms in the UK to ensure that the financial markets are honest, competitive and fair. The goal of the FCA is to protect consumers from harm caused by bad conduct in financial services, enhance market integrity by supporting a healthy and successful financial system and promote effective competition in the interests of consumers and take action to address concerns.
In July 2003, IG Group was a part of a management buyout backed by private equity firm CVC Capital Partners where they acquired its founder’s shares. CVS Capital valued IG Group at £143 million at the time. In 2005, after two years of private ownership, IG Group and CVC Capital Partners re-floated the company on the London Stock Exchange with a valuation of £393 million. Since then IG Group’s valuation has increased to £3.2 Billion which makes it one of the largest capital market companies in the UK.
IG Group has gone through several controversies in its time. The first controversy happened in 2007 when IG Group was labelled as a gambling company by the authoritative media. The newspaper publication The Telegraph stated that “although spread-betting companies such as IG Group have been regulated by the UK financial regulator, no amount of regulation will help you if you get your bets wrong, so in that respect, there is no doubt it is risky, and you should make sure you know what you are doing before you get involved.” In 2010 IG Group went through another controversy where IG Group subsidiary IG Index(spread betting firm), was hit with a claim of €25 million by three former clients of Echelon Wealth Management for unspecified losses. In 2016 IG Group went through another controversy where the FCA questioned whether binary bets serve as genuine investment needs and defined them as more akin to gambling. Aside from most consumers losing money, the FCA's other concerns included the addictive nature of binary options betting and inherent conflicts of interest. Since 2012 there have been a reported 2,605 victims who lost a total of £59 million on binary options scams(an average of nearly £23,000 each). In January 2017, IG group announced their decision to withdraw the binary options betting product, admitting that the arrival of the regulator to the market would significantly worsen the company's state of affairs.
Business Segments:
As shown below IG Group has 10 brands which offer different services to their customers. Below I am going to explain each one:
IG- This is IG Group’s legacy brand. This segment makes the financial trading market more accessible to retail and professional traders. Depending on where you live here is the product offering that IG has to offer:
CFDs- Available wherever there are IG Group sales offices, such as the UK, Australia, Singapore, South Africa and Europe.
Turbo24- IG Group’s unique 24-hour turbo warrants offering for European clients.
Barriers And Vanilla Options- Designed for traders in the UK, Ireland and Europe.
Investment Products- For a more traditional, longer-term market in the UK, Ireland, Australia and The United Arab Of Emirates(UAE).
IG Prime- IG Prime is IG Group’s institutional client offering.. Since its launch in 2006, IG Prime has offered new and innovative trading products to hedge funds, family offices, private investment vehicles, banks, brokers, and asset managers. With global reach backed by Tier 1 banks, and institutional and professional investors you can find opportunities across more than 17,000 equities and 24/5 pricing on major indices, FX pairs, commodities and more. IG Prime also offers direct market access(DMA) on equities and forex through the Synthetic Prime offering, as well as custody and execution services on equities and exchange-traded funds(ETFs).
TastyTrade- TastyTrade is the newest brand of IG Group. TastyTrade is an authentic, original and free online financial network, currently focused on options and futures. Producing over 40 hours of live programming every week, it delivers live trading, education and deep quantitative and probability-based analysis in a fun and entertaining way for people of all skill levels. Currently, TastyTrade is one of the fastest-growing online financial networks in the world, exponentially expanding its viewer and listenership since its launch in 2011. TastyTrade currently has over 100 original shows and 27 million YouTube views, with followers tuning in for inspiration, education, live trades and more.
TastyWorks- TastyWorks is a US retail broker for active stock, options, futures or crypto traders, with high growth and high margin. With a laser focus on personal independence over passive investment, it gives ambitious traders the tools they need to take charge of their financial goals. TastyWorks offers fast and reliable trading software, low rates, in-app content and world-class support to make it easier for people to control their own money. Various account types are available, each specifically designed to match the risk appetite and financial goals of a diverse range of retail traders, corporates and trusts.
DailyFX- DailyFX is a fast-growing global platform for news and analysis of equities, commodities and foreign exchange markets for retail traders. Over 34 million people visit DailyFX online, on mobile and social media annually. The platform has nine offices around the globe, located in Africa, Europe, The US, UK and Asia-Pacific. DailyFX offers highly localised content from its team of global macro analysts, along with popular tools like an economic calendar of major events from G-10 countries and numerous educational webinars.
Spectrum- launched in 2019, Spectrum Markets is IG Group’s pan-European multilateral trading facility(MTF) that offers a new approach to retail trading for those who want 24/5 access to the markets with complete transparency, increased choice and maximum control when trading securitised derivatives. Spectrum Markets aims to become an indispensable partner in the pursuit of wider access to market opportunities and is specifically designed and built for both financial institutions and their retail trading communities. Being an MTF, Spectrum Markets provides access to innovative products designed to give European retail traders flexibility and control over their trades, such as Turbo24(the world’s first 24-hour turbo warrant.)
Radius- Based in Germany, Radius is the issuer for Turbo24. It creates the securities, which are then listed and traded on Spectrum. Its speciality is issuing turbos hourly, so there’s always a steady supply of new securities with attractive knock-out levels available. That means traders get more access to opportunities.
BrightPool- BrightPool is a multi-asset market-making service provider based in Cyprus. It’s another link in the chain that brings Turbo24 to market, creating greater liquidity in the Spectrum order book.
IG Smart Portfolio- Launched in 2017 in partnership with BlackRock, IG’s Smart Portfolios is a discretionary managed investment service that helps to manage and rebalance the portfolio of investors for the entirety of their lifetime. IG Smart Portfolio offers low fees and full transparency on the total cost of ownership. Below is the current fee structure that IG Smart Portfolio is offering to its customers:
Management
When looking at management I like to assess the CEO in several different ways such as experience, capital allocation skills and Incentives. In this section, I will cover if management incentive is aligned with shareholders.
Experience- With a bachelor’s degree in chemical engineering and pre-med, June Felix has been the CEO of IG Group for 4 years. Before working at IG Group, June Felix was the managing director at Citibank and led the global banking and financial markets at IBM. Another high-profile job that she obtained in her career is working at JP Morgan and serving as managing director of Citi Enterprise Payments, where she led a global business focused on creating consumer-centric mobile healthcare payments. June Felix has also had several personal achievements throughout her life such as in 2013 when she was elected into the innovator’s hall of fame for Banking systems and technology and named one of the top 10 leading innovators by Banking Technology News. lastly, June Felix was named one of the most influential women in banking by US bankers and has been a frequent speaker at client and industry events globally. Below is the current experience of IG Group board members.
Capital Allocation-When it comes to judging management I think capital allocation is very important because we want management to create shareholder value and not destroy it. So far IG Group’s capital allocation has been spot on because they are giving value back to shareholders via dividends, a share repurchase programme and making strategic acquisitions to further grow the business.
IG Group is currently paying a dividend with a yield of 5.71%. As shown below this dividend is sustainable because this current dividend only takes up 27% of their overall free cash flow.
In July 2022 IG group launched a £150 million share repurchase programme which ends in 2023. JP Morgan will repurchase these shares on their behalf.
Incentive-This is important because if the current board is actively purchasing stock of their own business this is a positive indicator that shows that management believes the stock is undervalued and they believe in the long-term prospect of the company. As you can see below insiders are buying IG Group shares with CEO June Felix making up the bulk of the purchase.
Bull And Bear Case:
In this section, I am going to highlight the bull and bear case for this investment.
Bull Case- As shown below IG Group currently operates in several countries such as Spain, The USA and even Japan. IG Group’s growth prospect will come from Emerging markets and growing markets like The United States. The foreign exchange market share is expected to increase by $1.94 trillion from 2021 to 2026, at a CAGR of 8.87%. With the recent acquisition of TastyWorks IG Group should be able to capture some of that market share as they are one of the leading brokers in the world with a well-recognisable brand in the trading community.
Source: IG Group Current Locations
Bull Case-My second bull case is the licencing which is a strong moat. IG Group currently operates in 19 other countries such as The USA, Australia, Japan etc. Having a license in so many different countries gives you access to so many different revenue streams. Most companies find it difficult to get a licence in more than one country because each country has their own rules and regulations that companies have to follow. The fact that IG Group can obtain a license in 19 other countries is a major achievement because it shows you they have a high reputation.
Bear Case-My first concern is regulation. Taken from IG Group 2021 Annual Letter here is what the company has to say on regulation. “Governments or regulators may introduce legislation or new regulations and requirements in any of the jurisdictions in which we currently operate. We face the risk that this could result in an adverse effect on our business or operations, reducing our revenue, raising costs or increasing our capital and liquidity requirements. We operate to the highest regulatory standards and believe that we lead the industry in the way in which we deal with our clients. We maintain constructive relationships with our key regulators and actively seek to converse with them to keep abreast of emerging regulatory trends or developments”
Bear Case-My second concern is competition. Taken from IG Group 2021 Annual Letter here is what the company has to say about the competitiveness of the industry. “IG Group operates in a highly competitive environment, which includes some unregulated and unethical operators. We work to mitigate competitor risk by maintaining a clear distinction in the market in terms of product, service and ethics, and by closely monitoring the activity and performance of our competitors, including a detailed comparison of the terms of product offers. We consider ourselves the leader in our market and, given our strong ethical values, we never deploy questionable practices, regardless of whether they would prove to be commercially attractive to clients. We do, however, aim to ensure that our product offering remains attractive, taking into account the other benefits that we offer our clients. These include brand, the strength of technology and client service quality. This allows our business to provide a competitive offering overall and manage competitor risk without compromising our values.”
Valuation:
In this section, I am going to talk about valuation. Using some basic metrics I am going to compare IG Group against some of its industry rivals and see if the company is cheap relative to its peers then I will value IG Group using a discounted cash flow model to come up with a price I am willing to pay based on expected growth rate and our desired return of 15%.
As shown below when comparing IG Group against its peers it scores 1/6 against its competition whilst CMC Market and Close Brothers score 2/6. You might be wondering why don’t we just buy Close Brothers Group and CMC Market since they look like the better company if you go by the metrics.
As shown below if you exclude the London Stock Exchange IG Group has a 6.7% market share followed by Close Brothers Group with a 4.1%. and CMC Market with 2.1%. IG Group is by far the market leader and it will only increase over time since IG Group is going into different markets like the USA.
In this final part, I will be valuing IG Group using a discounted cash flow model to come up with a price that I want to pay using 15%. When valuing a company I tend to be conservative so below is the valuation of IG Group based on a 6-year projection.
As you can see based on a conservative assumption where IG Group is looking to grow around 6% I went conservative and assumed 4% growth in the first 1-3 years then the growth will slow down to 1% 4-6 years out. In my assumption, I also went with an exit multiple of 8x earnings which is slightly below the 10X earning IG Group has always traded at on average. Based on my assumption I have come to a buy price of £9.87p which means right now IG Group has significant upside potential if you compare it against the stock price of £7.53p. As a disclaimer, I also went conservative on the free cash flow. I did a 5-year average because I wanted to see how conservative I can get where I can still have a margin of safety
Side note: I currently own shares in IG Group Holding PLC.
Thanks for reading my newsletter on IG Group PLC. Disclaimer this newsletter is not financial advice this is for educational purposes only so please DON’T take this as a buy or sell signal.
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Hi Wes, I promised I would read through some of your write-ups, and sorry for the delay. Just a short comment from me: how would you respond to the argument that these companies are value traps and sin stocks with no catalyst for intrinsic value realisation? The provision of gambling products like CFDs has drawn the ire of regulators for a long time (I think more than 80% of trades lose money), and new regulation could kill the these highly profitable models in a short space of time (little downside protection). I know this because I looked at Plus500 a while back. Best wishes for 2023!
Excellent analysis and thorough evaluation. Thank you. Can I ask how you came to a 4% revenue growth rate in initial years please? I can’t seem to find anything to support and simply walk st has revenue set to decline.