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IG Group still materially undervalued, despite recent rally

IG Group's share price has regained its poise since last month's announcement about more onerous leverage limits but Barclays reckons the shares are still cheap
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Barclays assumes regulation will hit fiscal 2019 EPS by around 10% vs fiscal 2018, creating a 'trough' EPS of 46p

The spread betting industry was rocked by the announcement last month of more onerous leverage limits but IG Group Holdings PLC (LON:IGG) has regained equilibrium.

Despite the share price recovery, Barclays thinks IG is still materially undervalued.

READ: Spreadbettors drop as EU watchdog proposes curbs on core business parts; UK regulator expected to follow suit

It notes that the shares peaked at around 957.5p in 2016 before hitting a trough of around 457p towards the end of that year on the threat of tighter regulations, and although the shares are now around only around 20% below that 2016 high, there is still a discrepancy between that 20% mark-down and IG's statement that the new regulations would likely lead to a less than 10% decline in revenue in fiscal 2017.

Barclays' new forecast earnings per share of 46p for fiscal 2019 implies that the shares are now trading on a projected earnings multiple of 15.6, with a dividend yield of 5%.

“In a market where ‘winners’ seem disproportionately rewarded with a high valuation multiple, this rating seems anomalous for a global leader in CFD trading,” the Barclays team noted, as it cranked up the target price to 920p from 650p.

“We believe a key debate is whether IG should trade on a higher or lower multiple ‘post regulation’ vs ‘pre regulation’. If the key investment case risk of regulation creates ‘only’ a 10% reduction in FY19 EPS vs FY18, and if there are no further regulatory shocks, then the argument for a higher multiple seems strong. Much will depend on industry dynamics from here. Will IG take market share from weaker competitors now we have a level playing field from a leverage perspective, or will some competitors move offshore and thrive as they evade new regulation?” the Barclays team wonders.

READ: IG Group reports record quarter despite quieter financial markets, although regulatory worries remain

Its upside case assumes no fall in earnings per share as regulation has a limited impact on client activity, in which case a valuation of 1,175p would be merited.

The bear case, which factors in regulatory changes in the UK and EU plus a regulatory hit in Asia, drives a fair value of 475p.

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