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