LONDON -- I have reviewed IG Group Holdings
Reading the form book
The main test for any value play as I see it is whether the tangible book value of net assets exceeds the share price -- in other words a price-to-book (P/TB) ratio under 1. According to its balance sheet it had net assets of 447 million pounds, but against this it had intangibles of 115 million pounds, leaving net tangibles of 332 million pounds or about 91 pence per share.
At the share price of 458 pence, the market cap is 1,664 million pounds and P/TB is around 5. This is nowhere within sight of value territory, and I recall that was similarly the case in my last review. But it must have something going for it or I wouldn't have picked it at all. And that something must have been damned attractive to trade against the lack of tangible asset cover.
And indeed it was, my second-most important criterion, net cash. Not only does this company regularly sport net cash, it is pure net cash -- by which I mean the complete absence of any debt. An exceedingly rare situation for any company, and especially among larger caps because IGG isn't any old tin pot, sitting where it does around the top of the FTSE 250. And the bigger the better for value shares, so this is another mark in its favor.
There are various measures of cash in IGG because it holds enormous sums of money due to clients, so I'll analyze it all out. The gross figure of cash held is a monster 961 million pounds. Deducting segregated client funds and other client calls on this money leaves them with net own cash at its most conservative by my reckoning of 168 million pounds at May 31, 2012. That compares very favorably with 41 million pounds a year ago, and the difference is an increase of 127 million pounds, itself a powerfully attractive feature. IGG is a cash cow.
The gross cash figure matters because they can earn interest on it. In the latest year, they made about 10 million pounds just from client money alone and that's at the very low interest rate levels prevailing. So there is a direct benefit in this way from holding as much client money as possible, even though it is not theirs and retained in strictly segregated accounts.
Now the yield. Dividends have increased annually at a good rate since the company was refloated on the market in 2005. The latest figure, for the year to May 31, 2012, is 22.5 pence up 12.5% on the previous year for a historical yield of 4.9%. The company says it intends to pay out 60% of earnings in dividend and the analysts' consensus for 2013 is 22.9 pence, which seems a little low to me, but anyway, this makes a forward yield of 5.0%. Not bad, and also puts it in the value sphere.
The 2013 EPS forecast is 38.8 pence making an expected price-to-earnings (P/E) ratio of 11.8. That's not enormous, but I wouldn't call it a value level.
The directorspeak for the past year talks of solid growth in active clients and revenue per customer. Looking ahead, revenue in the first six weeks of the current financial period has been lower than the same period last year, as dull markets in this period have presented clients with fewer trading opportunities. However, they continue to expect modest growth in revenue for the year as a whole.
IGG thrives on volatility because this promotes activity by punters. The greater the swings in the market being bet on, the greater the profit potential and thus the more desirable it appears. And, naturally, the greater the loss potential, too. IGG is a principal, not a broker, and thus takes the risk, the other side of every bet. Their margin comes in the price spread they quote.
Bad debts can be a problem, and a few years ago when the credit crunch appeared and huge gyrations took place in many share prices, especially certain banks, they took a big hit from too many people betting the wrong way, losing heavily and then failing to pay up. IGG shares were hit badly by this news, but recovered as the company got its act together on credit control. I bought my first tranche back then at around 200 pence.
Foolish final words
Summing up, it's no asset play but it's certainly a cash-and-yield play. Companies that can just churn out the cash are attractive if they stand on value ratings, and I'd say IGG does to a large extent though it's not an absolute bargain due to the P/E not being way down in single figures and lack of asset cover.
The risk with cash producers is that they blow it on some dumb acquisition and IGG has done just that before, paying excessively for an entry into Japan where it was promptly strangled to a great extent by onerous legislation. But against that, it has made other much more successful foreign acquisitions -- though, I'm wary of companies that do this because too often it's mere empire building and they don't work out.
Finally, although I advocate that investors never buy value shares with bid potential as their main attraction, I can't help thinking that a cash mine like IGG may well attract attention, though I think I've said this before.
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