RBC Capital Markets has reiterated its outperform rating on IG Group Holdings Plc (LSE:IGG), arguing the market has punished the trading platform too harshly for its acquisition of prediction market operator Underdog.
Analyst Ben Bathurst set a price target of 1,850p, implying total returns of around 43% from the 1,332p at which the shares closed on 13 August.
IG shares reached a record high of 1,955p in June but have fallen about 22% since the Underdog deal was announced on 30 July, wiping around £1.2 billion off the market value.
That drop exceeds the up-front consideration for the asset, suggesting investors are ascribing no value to the acquired business.
Bathurst said the reaction was disproportionate, given broad acceptance of the strategic logic behind the move.
The deal takes IG into daily fantasy sports and fast-growing sports prediction markets, diversifying a group historically reliant on contracts for difference and spread betting.
RBC published its first pro forma model for the enlarged group, forecasting minor earnings dilution in 2027 before 11% earnings per share accretion by 2029.
By then, Underdog is expected to account for more than 30% of group revenues.
The bank expects Underdog revenue to grow at a compound annual rate of 26% between 2025 and 2029, lifting the enlarged group's growth from 9% to 14%.
The main uncertainty is regulatory, centring on whether US sports event contracts are treated as gambling products overseen by individual states or as financial derivatives under federal jurisdiction.
RBC expects that dispute could reach the Supreme Court and may not be resolved for up to two years.
IG now trades on around 10 times forecast earnings, close to its five-year average of nine times.
The bank said the fall had created an attractive risk and reward balance, with scope for sentiment to improve as the deal's benefits become clearer.
