IG Group trading statement

Engaged in derivative trading services, providing financial contracts for difference, spread betting and exchange-traded derivatives to retail investors internationally.  I have a holding in my income portfolio (epic code: IGG).

IGG issued a trading statement declaring that it expects to report trading revenue of £104.3m for the final quarter of the year, 8% ahead of the same quarter last year.  This will give £361.9m for the full year, 1% behind the prior full year, but more than 2% above market expectations.

 

Stronger H2 revenue and one-off items of £4m will positively impact their Profit Before Tax and they expect it to be ahead of the prior year.  The main element of this £4m relates to their successful defence in the legal case, served in November 2010, arising from the insolvency of Echelon Wealth Management, the plaintiffs have paid a substantial contribution to the legal costs incurred by IG

 

Following the reduction in operating costs in 2013, IG expects these to rise in 2014.  This Increase in costs in FY14 is planned to drive future growth, although it is not anticipated that this investment will deliver any significant revenue benefit in the current year. 

 

There was a negative comment relating to their Japanese operation (less than 6% of sales), new rules from the regulator limit the use to one type of binary options, which are not currently offered by IG, but do constitute the principle forms of binary offered by a large number of competitors.  One does wonder how long it will be before IGG take the decision to close their Japanese operation.

With the increase in their cost base and the continued problems in Japan, it will put pressure on their ability to increase profits in the current year.  There is a risk that future dividend increases in the short-term will no longer comfortably exceed inflation, having grown by over 20% pa for the past 5 years.  IGG have a policy of distributing 60% of earnings from a good cash generative business, but they are exposed to requiring high volatility within markets to generate growth in their business.  IGG is not a company with an economic moat, it has no perceived durable competitive advantage other than its competent operating systems. 

I have held IGG for 4 years and they represent 3% of my income portfolio, having halved my holding about 2 years ago.  It may be time to look at an exit, having achieved a return of just over 25% pa (dividends not reinvested), it would be disappointing to see returns diluted.