RBC lifts IG Group target price after trading update

IG Group had its target price lifted to 815p from 800p and its ‘sector perform’ rating reiterated by RBC Capital Markets on Friday after the spread-betting operator reported its fourth quarter trading update.

The company on Tuesday said it had performed “well” in the last three months of the fiscal year despite a relatively quiet quarter in financial markets.

IG said it expected to post full year earnings slightly ahead of expectations next month, driven a continued robust performance and ongoing strength in trading revenue.

“Post IG’s pre-close statement on 31 May and incorporating our updated thoughts on the company’s future potential, we increase our forecasts across the board, largely by 2%,” RBC said.

RBC expects full year revenue of £442.1m, compared to £399.4m the previous year. Earnings before interest, tax, depreciation and amortisation (EBITDA) is pencilled in at £216.9m and earnings per share (EPS) at 44.0p, following 2015’s £204.1m and 41.1p respectively.

“IG is a well-run company that is benefiting from market volatility through increased client activity. Further positives include IG’s market leadership in key markets, a 40-year operating history and well-known brand, high profit margins (2016 full year EBITDA margin: 48%), a shareholder-friendly dividend policy (70% pay-out) given strong free cash flow characteristics (high profit margins and cash flow conversion yield healthy levels of operating cash generation; capital expenditures are minimal), an increasingly cash-rich balance sheet, and ongoing growth, as we expect net revenue, pre-tax profit, EBITDA, EPS and the dividend to grow at 7% to 9% compound annual growth rate from fiscal years 2015 to 2018.”

The broker said shares are trading just below their fair value and therefore continues to believe that IG warrants a ‘sector perform’ rating.

RBC added that the volatile market backdrop, coupled with uncertainty around economic growth, interest rates and the UK’s EU referendum, are presenting ideal conditions for IG’s clients to increase their trading activity.

“We therefore believe that the uncertain market backdrop and IG’s dividend yield – at around 4%, while not standout, is safe and increasing – should support the shares at around the current level.”

Shares rose 0.57% to 796p at 0950 BST.