IG Group (IGG.L, FTSE Mid-250, Market Cap £3.1bn, 845p, Medium Risk/High Reward, 5.0% target, currently 5.1% of JIC Portfolio)
IG Group Holdings plc is a global financial technology company based in the United Kingdom. It delivers online trading platforms and an educational ecosystem. The Company’s products include OTC leveraged derivatives, exchange-traded derivatives, and stock trading and investments.
Results for the year ended 31st May. The full results can be found HERE
Conclusion: At face value, the numbers do not look very impressive, but compared to expectations, they are fine. Trading volumes were down, leading to a 10% drop in net trading revenue. However, revenue and profits received a huge boost from net interest income, which accounted for 14% of revenue last year, up from 8% the year before. The new CEO outlines changes he has identified to boost IG’s position in the market and grow trading revenues. The biggest help, though, is likely to come from an improvement in markets, which looks to be underway. The balance sheet remains strong, hence the small increase in the dividend and another £150m share buyback (5.0% of the current market capitalisation). It says it is happy with current expectations for the year ending May 2025.
On current forecasts it is valued at only 8.6x May 2025 earnings and is on a yield of 5.6%. That’s cheap and the share price should go higher, even if not today, especially given the share buyback. (Deutsch Bank lifted its price target to 1065p on Tuesday). If trading revenue starts to improve, it should drop through to profits, leading to upgrades. Until then it remains a value situation rather than a growth story. I remain a Happy Holder with my Rising Price Review at 950p.
Financial highlights
Delivered resilient results in slower market conditions and controlled costs well throughout a period of leadership and organisational change.
- Total revenue of £987.3 million (FY23: £1,022.6 million), down 3%.
- Net trading revenue of £844.9 million (FY23: £941.8 million), down 10% due to reduced trading activity.
- Net interest income increased to £142.4 million (FY23: £80.8 million) reflecting higher interest rates.
- Adjusted[2] profit before tax of £456.3 million (FY23: £490.5 million), down 7%. Adjusted profit before tax margin was within the guidance range of mid-to-high 40s at 46.2% (FY23: 48.0%). Statutory profit before tax of £400.8 million (FY23: £449.9 million), down 11%.
- Adjusted basic EPS of 90.3 pence (FY23: 94.7 pence), down 5% on FY23. Statutory basic EPS of 79.4 pence (FY23: 86.9 pence).
- Total capital return of £422.7 million split across dividends paid and shares re-purchased in the period (FY23: £363.4 million).
- Proposed an increased total dividend per share of 46.2 pence (FY23: 45.2 pence) and a new share buyback programme of £150 million to be completed by 31 January 2025.
Strategic and operational highlights
- Following the appointment of Breon Corcoran as CEO in January 2024, new organisational structure recently created to enhance product velocity and client centricity. Initiated work to change IG's culture to increase ownership and accountability.
- Launched an operational improvement programme in October 2023, and we continue to explore opportunities to enhance efficiency.
- High quality and strength of risk management framework and controls evidenced by a 40% reduction in the Group regulatory capital requirement in August 2023.
- Total active clients of 346,200 (FY23: 358,300) down slightly in markets which were less volatile. First trades of 69,900 (FY23: 72,600) were down 4%.
- tastytrade delivered record total revenue which increased 23% to $251.8 million (£200.6 million) from $205.0 million in FY23 (£170.3 million) reflecting 10% growth in net trading revenue ($160.1 million) and 53% growth in interest income ($91.7 million).
Breon Corcoran, Chief Executive Officer, commented:
"IG has a sound position in large, growing markets, underpinned by an established brand and a loyal, high-value client base. However, I've also identified areas requiring change. We have lots of work to do to take IG to the next level and address the challenges we face.
"We operate in a competitive industry landscape that is changing rapidly. We must move at pace to get closer to our customers, give them the products they want more quickly, enhance efficiency, and add scale to win. My initial priorities are to increase client centricity, accelerate product velocity and develop our culture to increase ownership and accountability.
"I'm excited by the enthusiasm of our people and their commitment to delivering sustainable, stronger growth. I'm confident that we have a solid platform on which to build."
Year in Review
The Group delivered resilient results in FY24 in slower cyclical market conditions, supported by execution of our strategy to expand and diversify by both product and geography.
Total revenue declined 3% on the prior year, as lower trading revenue was largely mitigated by stronger interest income. Within total revenue, trading revenue declined 10% as weaker OTC derivatives revenue was partly offset by growth in exchange-traded derivatives, with stock trading and investments revenue flat.
Operating margins remained strong and adjusted costs were relatively well controlled in the year, increasing 4% on FY23, reflecting the early benefit of efficiency measures announced in October 2023.
The high quality and strength of our risk management frameworks and controls was evidenced by a significant reduction in our regulatory capital requirements in the year.
OTC derivatives
OTC total revenue declined 9% driven by lower trading revenue reflecting moderation in active clients and lower revenue per client. Active clients declined 6% in the year, although weakness was largely seen in Q1 and client numbers were broadly stable over the rest of the period.
Lower trading revenue was partly offset by increased interest income, reflecting higher monetary policy rates in several countries. These trends were broadly similar across most geographies except Singapore which delivered stronger trading revenue reflecting higher volumes from some of our largest traders.
Trading revenue held up well relative to the decline in volatility across a range of asset classes as clients remained engaged on our platform and continued to seek trading opportunities. Trading revenue continued to be driven by clients onboarded in prior years and retention was consistent with long-term trends.
Exchange-traded derivatives
Our exchange-traded derivatives (ETD) business is dominated by tastytrade, our US options, futures and equities business, which generates approximately 94% of the Group's ETD revenue. Our ETD business also includes Spectrum, the Group's European multi-lateral trading facility.
tastytrade total revenue increased 23% in the year in US Dollars, reflecting trading revenue up 10% and interest income up 53%. Stronger trading revenue was driven by increased revenue per client. Average market share of OCC options volumes attributable to retail customers was up modestly relative to the prior year.
Total client equity, which includes free cash and the value of open positions, reached $5.1 billion at the end of FY24, a new record. Within this, interest-bearing free cash balances were steady.
tastytrade's performance gathered momentum throughout the year. FY24 was a record year for total revenue and trading revenue, H2 was a record half on both metrics, and Q4 was a record quarter.
Almost a third of new tastytrade accounts come from outside the US, despite no marketing historically, evidencing international demand for US options and futures. This is also reflected in client surveys which show that our existing OTC clients are interested in trading US options and futures.
During the year, we completed our preparations to launch tastytrade in the UK, which went live at the beginning of June 2024. We plan to roll the offering out to other international markets where IG already has a presence.
Spectrum revenue is driven mainly by trading activity and trading revenue declined 12% in the year. This reflected a strong Q3 in the comparative period, and a softer H1 in the current year. As a newer business, with a smaller client base, revenue can be more volatile than more mature parts of the Group which are already operating at scale. Active clients were broadly stable.
Stock trading and investments
Total revenue was up strongly reflecting higher interest income, with trading revenue broadly flat. Client numbers were down 4% but assets under administration (AUA) increased to £3.9 billion at the end of FY24 (FY23: £3.3 billion), driven by market performance.
Operational efficiency
During the year we launched an operational improvement programme and recently made changes to our organisational structure and culture. These changes will help us to bring new products to market more quickly and efficiently.
As part of the implementation of our operational improvement programme, we announced plans to reduce headcount by approximately 300 which represented around 10% of the total workforce at the end of FY23. We have made good progress implementing these changes, with headcount at 31 May 2024 of 2,570 down 8% relative to 31 October 2023, when the measures were announced. In FY24, we incurred £19.1 million of non-recurring costs to achieve these efficiency measures, in line with guidance of approximately £18 million.
We expect further savings and headcount reduction in FY25 as we focus on the offshoring of some roles to our global centres of excellence, following a period of dual running, as new teams are onboarded.
We have implemented a flatter organisational structure and moved several central functions, including marketing, product management and some technology teams, into four geographically-aligned divisions to enhance client centricity and product velocity. We have continued to optimise the way that our global centres of excellence in Poland, India and South Africa support the business and identify opportunities to automate business processes. We are also developing our culture to enhance ownership and accountability across the organisation.
In the year, we also successfully migrated our data centres to new locations, ahead of schedule.
Capital allocation
We continue to allocate capital in line with our Capital Allocation Framework.
Our first priority is ensuring that we meet our regulatory capital requirements. On 1 January 2022, the Group transitioned to the Investment Firm Prudential Regime ("IFPR"). As announced in September, following the first Supervisory Review and Evaluation Process ("SREP") under the new regime, the Group's regulatory capital requirement reduced from £497.4 million at 31 May 2023 to £289.8 million as at 31 August 2023, evidencing the high quality and strength of our risk management frameworks and controls.
As at 31 May 2024, our Group minimum regulatory capital requirement was £298.6 million (31 May 2023: £497.4 million) and regulatory capital resources totalled £936.9 million (31 May 2023: £996.3 million), equating to headroom of £638.3 million (31 May 2023: £498.9 million).
We continue to allocate 1% of post-tax profits to charitable causes. For FY24, this equates to £3.5 million which will be proposed to be donated to charities focused on empowerment through education.
A proposed final dividend of 32.64 pence per share represents a total dividend for the year of 46.2 pence per share, an increase of 1 pence on the prior year, representing a progressive and sustainable increase.
Having assessed regulatory capital headroom and alternative uses of capital, we have announced a £150 million share buyback which will start in the coming weeks and complete by 31 January 2025.
Outlook and guidance
In FY25, the Group expects total revenue and adjusted profit before tax to be in line with market expectations which can be found on the IG Group website. The Group tax rate is expected to be approximately 24%.
IG has solid positioning in large and growing target addressable markets but there is much more we can do to unlock our potential. We have to get closer to our customers to deliver better products tailored to their needs more quickly, drive efficiency and add scale in the pursuit of stronger growth.
We are also developing our culture towards greater ownership and accountability across the organisation. Delivering against these objectives will be key to growing our market leadership and achieving sustainable, stronger revenue growth.
