IG Group Update – reiteration of SBM Short call v Long LCG pairs trade idea

15 Jan 13 – We produced below at the end of October and today’s results out from IG increase our confidence that they are wildly overvalued whilst LCG sits at a woeful undervaluation. The Directors selling at IG in recent years, in meaningful size, should not be ignored. Ditto with the flat dividend – not a sign of confidence…

Our view, and with a good amount of indepth understanding of the industry, is that the Spread betting area, certainly in the UK, is saturated now. The results from all the spreadbet firms in the last year pay testimony to this and so the only real way to drive future profitability is through increased marketing – which will of course hit the bottom line againt flat top line growth or enhanced risk taking (and so volatility in profitability) against their client base. IG’s main revenue source is from the UK and it is noteworthy that their active clients fell 14% over the last 6 months. Condense below from the CEO –

“All of these factors impact on the behaviour of our existing and potential clients and in the period we saw reductions in the overall number of clients actively trading, the revenue we generated per client and the number of new clients signing up.”

Our call is very simple – IG trades at a £1.3bn premium to net tangibel book, LCG trades at a £3m DISCOUNT to its net tangible book. This is not likely to last for much longer in our opinion.

From end Oct 2012 – 

We covered IG Group in the September edition of our magazine, highlighting the sustained Directors selling over the last 2 years whenever the share price approached the 500p level (Link here, page 30 – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v8_generic).

The recent decline in profitability at London Capital Group is, I hear, not isolated purely to them but is in fact affecting the industry in general at the moment. IG will not be immune to this. The recent market action of low volatility and a grind higher in equity markets (indices betting being the main profit generator for these firms) is not conducive to high trading volumes by clients, nor is the current absence of volatility that throws client accounts around and typically delivers profitability to the spread bet firms a good backdrop.

The technical picture was also highlighted in our September piece aswell and in recent days the weakness of the stock relative to the market prompted me to re-visit the technical picture.

Take a look at the chart below – there are numerous worrying signs for bulls of the stock. firstly we can see that the share price is below both the 19 & 37 week exponential moving average and which are both turning lower and have crossed through each other – something that has happened only once before in the past 5 years in early 2011 and that prompted the stock to fall around 20% over the ensuing 6 months. We are also perilously close to falling through the bottom of the triangle formation that has been in the making for nearly 2 years. A break to the downside here would target the 300p level.

Both the RSI & MACD are confirming the downtrend too with the RSI falling below the 50 mark and the MACD rolling lower. In short, the technical situation is shocking.

5 year weekly chart

I would not be at all surprised if current trading conditions persist to see IG issue a profits warning. With the stock trading at a very substantial premium to its net cash in complete contrast to LCG that now trades purely at its net cash (in effect valuing the business at zero), punters could enter a “pairs trade” in IG V LCG, namely short IG Group v Long LCG in equal proportions or of course could simply short IG outright. Accordingly we add the pairs trade to our trades list today.

Editor.