Tuesday, 18 January 2011

Has the sun set on IG Index?

Well, I have to say that the first few weeks in January have been nothing if not interesting and another mainstay of my Growth portfolio, IG Index, has been under pressure today after an interim statement for the 6 months ending 30 November 2010.

IG Index @ 481.5p, -37 (1:30pm)

The company has struggled with its Japanese operations as regulatory changes have impacted trading volumes and revenue. And, after judging this to be an impact on future trading volumes in its Japanese operations, the company has decided to writedown the value of the affected assets by £143m. The upshot here is that (on paper) the company's asset value is now reduced by £143m (incl. goodwill) and "trading" profits before tax of £81m have turned into a loss of £69m (2009: £69m profit).

The problems have been well publicised and it seems that analysts have speculated for some time that IG would need to write down its investment as future prospects for Japan may need reigning in by as much as 2/3rds. So it is some surprise to see the initial reaction to a prudent paper write down.

Putting the write down to one side revenues, profits and client numbers all increased and the cash positive, debt free company has still rewarded shareholders with a 5% increase to the interim dividend (5.25p per share. 26 Jan 11 xd date).

Out of the company's increased revenue of £156m (+9%), Japan contributed £11.1m and IG have indicated that, in their view, future trading volume for Japan could be 50% below this level and at a 52% profit margin (average for this 6 month period), that could equate to a £6m hit to revenue and a £3m hit to pre-tax profits going forward.

The company's decision is prudent as is its move to reduce costs to suit a reduced expectation from Japan but the big question would seem to be what impact does this have on the company's future prospects for growth with analysts consensus forecasts currently predicting 8% (2011), 14% (2012), and 12% (2013).

It is still the industry's biggest player though and cites new technologies (mobile apps) and continued increases in its client numbers as major plus points. I would still suggest that volumes are likely to increase if confidence in the financial markets continues to improve

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