RBC Capital downgrades CMC Markets on FCA crackdown, slashes IG target

RBC Capital Markets downgraded its stance on CMC Markets to ‘sector perform’ from ‘outperform’ and cut the price target to 170p from 315p after the Financial Conduct Authority announced plans on Tuesday to tighten the rules around contract for difference products.

“While acknowledging that the impact of the FCA proposals is difficult to determine at this time, we lower our forecasts and decrease our price target on a negative outlook for the sector,” RBC said.

The bank said the changes are likely to hinder growth and profitability going forward and as a result, cut its earnings per share estimates. It reduced its forecast for adjusted diluted EPS in 2017 to 13.10p from 15.10p, for 2018 to 14.80p from 19.00p and for 2019 to 16.30p from 21.30p.

Still, RBC reckons CMC will maintain its full-year dividend going forward at the FY16 level thanks to the strength of its balance sheet.

The bank said that following the drop in the share price on Tuesday, the stock is now optically cheap, trading at around 8x FY18 earnings. However, it pointed out that this assumes its earnings forecasts are correct.

“We acknowledge that the outlook has deteriorated dramatically and that earnings visibility is quite low.”

RBC Capital also took a look at IG Group in light of the proposed FCA changes, keeping the stock at ‘sector perform’ but slashing the price target to 500p from 865p.

“We do not believe that IG was the FCA’s intended target, but will be negatively impacted nonetheless. We believe that the proposed changes will likely hinder both client growth and client profitability going forward.”

As a result, the bank cut its adjusted diluted EPS estimate for FY17 to 45.90p from 46.40p, for FY18 to 46.50p from 52.80p and for FY19 to 49.00p from 57.80p.

At 0952 GMT, CMC shares were up 3% to 118.50p, while IG shares were up 1.6% to 492.91p.