London Capital Group shares spring to life. SBM makes them a Conviction Buy (and still sellers of IG)

We have been buyers of London Capital Group shares in recent weeks, believing the company to be woefully undervalued at current levels. At the nadirs around 34p, they were in fact trading at an approximate £3m discount to the net cash resources of the company which means that the company’s IT platforms, brand, FSA licence, staff expertise and large client base were essentially in for free.

Of course, there was a reason that the company was trading at such a depressed level and that was (a) the fear that they will continue to lose money in the near term and/or (b) the compensation/redress liabilities that they may be hit with in relation to an ongoing FOS case on behalf of some 86 plaintiffs that sums to just under £3m will eat into that cash pile.

Historically, the company has achieved an average EPS of just under 5p over the last 4 years and, with competitor IG Group trading on a multiple of 13 times, if they are able to get back to this level then a share price of around 60p would be achievable – this level of course includes the cash on the balance sheet and which should arguably be backed out. A price towards 100p could then possibly be ascribed if you were to value the business ex the cash. Of course a bidder will adjust for potential liabilities per the litigation detailed above. Still 70-80p seems a sensible level and is modestly (and importantly) above the placing price of 60p almost 2 years ago – a level which must be an absolutel floor for management and the institutions that supported this.

They are also still paying a dividend which is a sign of confidence in the future and at the current price they yield around 4.5%.

It’s no secret that the industry is in a little disarray at present, and that growth has slowed and probably reversed in the UK in particular. IG’s growth has mainly been coming from overseas – an area that LCG is not in fact strong in. In effect, within the UK, everybody is trying to take each others clients – a zero sum game at the end of the day that begs for consolidation. And this is what I think the market has caught wind off – that LCG are not going to the wall and that at alikely profit cycle nadir for the industry, if you are looking to expand your presence in this area and cost effectively, then acquiring LCG is an intelligent way to achieve this. My money’s on Betfair making an all share offer for them.

LCG 2 year weekly chart

We add LCG to our Conviction Buy list today at 39p.