Odds are against a winning return for the refloated IG

The odds that investors will make money out of the upcoming reflotation of shares in IG Group, are unattractively long. Shares in the company certainly seem destined to trade at the lower end of the 112p to 139p mooted range when they come to market later this month. They might bust through the floor.

The easy way of indicating that CVC, the private equity seller, is expecting too much is to recall that CVC bought IG three years ago for about one third of the hoped-for value now. That methodology, admittedly, is a little unsophisticated because the spread betting market has developed and thanks to the passage of time IG operates within an industry that is more established and relatively robust. The number of active clients on IG’s books has grown and profits are higher too. IG has also adopted a comprehensive policy on hedging the bets it takes on. In a previous stock market guise, under the chairmanship of Stuart Wheeler, the Tory Party donor, IG profitability swung wildly because it did not buy itself insurance against bookmaking losses.

The company has also developed a new form of spread betting known as binary betting. Binary betting takes the scariest aspect of spread betting out of the equation because the amount of money that can be lost in a bet is limited. (Binary betting also limits the punter’s potential upside, mind.) But despite all these factors the pricing is too rich. Investors should make their judgments assuming that the stock will float at the top of the range because that might be what they end up paying. At 139p — or £435 million — the stock will trade at the equivalent of 25 times the estimates of earnings per share in the year to May 2005. The dividend yield will be 1.9 per cent. If, as some analysts believe, IG grows at 40 per cent next the year the earnings multiple falls to a more reasonable 17 and the yield rises to a more comfortable 3 per cent. But these benchmarks still leave the stock on a premium rating. And the assumed growth rate is nothing if not ambitious.

There is a large threat that the tax friendly status enjoyed by the spread betting fraternity will disappear. CVC’s retention of a 59 per cent stake creates a large, price depressing, stock overhang. Leave well alone.

This entry was posted on Saturday, April 16th, 2005 at 10:11 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.