IG Group @478.8p, +3.9p (+0.92%)
IG Group released a pre-close trading update yesterday (Trading statement for the year ending 31 May 2012. which continues to look promising with:
- expected growth in revenues from continuing operations of 17% (built on a strong first half).
- gross margins in the region of 50%.
Overall, the company also continues to grow client numbers and revenue per client although there are regional rises and falls which can only be specific to the economic environment at that time in that place.
The percentage performance numbers from Japan continue to muddy the company's performance charts as the small base provides a disproportionate percentage swing.
For example a 20% fall in revenues to £16.4m in 2012 but £16.4m represents just 4.47% of the company's estimated revenue of £366.8m in 2012.
For this reason, the impact is starting to become fairly marginal given the company's well documented moves to write down this investment, and "cap off" the losses, in line with a new lower expectation given the change in regulatory environment (Has the sun set on IG Index?).
The year on year revenue growth appears to have been built on a strong first half and, after falling to 1.5% in the 3rd quarter increased to 12% in the 4th quarter "with particularly strong client activity in the last month of the year" (Trading statement for the year ending 31 May 2012.), suggesting momentum and bodes well for the future.
Given the shaky economic environment, and a need for cash, there are "levy" risks from regulatory bodies such as the FSCS (IG: Update to FSCS Post.), and the continuing threat of an EU financial transactions tax.
But IG has a track record and continues to be the leader in its field. So all things being equal its strengths will continue to shine through once the playing fields are levelled.
The company appears to have managed itself conservatively, utilizing its profits and cash-flow so that it now operates with zero borrowings and a declared debt free balance sheet (Shares update: IG Group Holdings Preliminary Results.).
The company has also increased its total dividend payout in each of the last 5 years from 8.5p in 2007 to 20p in 2011. That's an increase of 135%.
And, if consensus forecasts are close then the forecast dividend of 21.52p for 2012 is covered 1.72 times by earnings per share of 37.19p per share.
Comfortably in line with the cover in each of the last 5 years
Adding further upside is the fact that 37.19p is based upon forecast revenues of £362m and as stated above the company has just estimated a higher £366m in its pre-close trading statement.
The total capital cost of the dividend paid last year was £67.7m (2010 Final and 2011 Interim) and we know that this years period affecting dividend payouts were increased by approximately 28%.
Which would suggest an estimated capital cost of £86.66m for dividends paid in the year ending 31 May 2012.
So looking for further "protection", the company's cash balances at the end of 2011 (as shown on the balance sheet) amounted to £124m (2010: £128m).
Debt free, a sizeable cash balance, a forecast yield of 4.8%, and trading on a utilitarian 12.5 forecast P/E.
Is the company ex growth though (or at least assumed to be), and, if so, has this, and the regulatory risks been fully priced in to the current share price. If not it surely can't be far off.
I have an investment IG which, at the end of May, represented 2.83% of the portfolio (May 2012: Portfolio Update.). Since 31 Dec 2009, my investment in IG is up 43.95% with a further 14.71% gain from dividends. 58.66% in total.
In spite of this the shares have actually under performed over the last couple of years and are down 9.18% year to date; and 15.08% since 31 Dec 2010.
But I'm still a happy holder and look forward to the company returning to better favour as the economic environment resolves itself.
Related links:
- http://www.iggroup.com: Trading statement for the year ending 31 May 2012.
- http://www.iggroup.com: AnnuAl RepoRt 2011 IG Group Holdings plc | 31 May 2011
Earlier posts:
- Has the sun set on IG Index?
- IG: Update to FSCS Post.
- Shares update: IG Group Holdings Preliminary Results.
- May 2012: Portfolio Update.
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