Numis has upgraded IG Group Holdings PLC (LON:IGG) to ‘buy’ two days after spread betting firms were clobbered by the regulator getting tough on trading on margin.
The financial regulator launched a crackdown on contracts for difference (CFDs) trading, trashing the share price of IG and rival CMC Markets Plc (LON:CMCX) in the process.
Read Spread bet firms tumble as regulator gets tough on CFDs
IG’s share price on Tuesday plunged from Monday’s close of 787p to 485p, and though it has recovered since to around five quid, that almost a full pound below Numis’s target price of 590p, which has been slashed from 850p.
The City firm has downgraded its IG earnings per share (EPS) forecast for the year to May 2018 by 37.5% to 28.9p following the announcement by the Financial Conduct Authority (FCA).
“We have referenced the FCA assumptions regarding customer savings of 20-40% as a consequence of their leverage restrictions as we believe this will closely correlate to industry revenue loss. The FCA also suggest that 38% of customers will not be impacted by the regulation which reduces the implied revenue impact to 12.4-24.8%,” Numis said.
The FCA was largely preoccupied with protecting retail investors, and Numis believes that customers accounting for a quarter of its revenue will be exempt from the new regulations on the basis of their professional trading status, which could further dilute the revenue impact to 9.3-18.6%.
Numis believes IG is by far the best placed spread betting firm to manage the regulatory change, thanks to its historical focus on higher value customers.
“Furthermore, we believe that the changes in the FCA proposals over the consultation period will see a number of changes that may exclude certain areas,” Numis added.
CMC Markets, on the other hand, remains a ‘sell’ for Numis, despite the share price collapsing on Tuesday from 184.4p to 115p.
The broker’s forecasts for CMC’s current financial year (to end of March 2017) remain unchanged, but next year’s EPS forecast is slashed by 43% and the year after that the forecast is now 44% lower.
The target price has been hacked to 95p from 140p.
“The retail leverage trading industry is coming under an increasing level of regulatory scrutiny around the world, with the most recent push coming from Europe. We believe this represents one of the biggest threats CMC has ever seen and in our view, will have a material impact on both its future growth and profitability,” Numis said.
The broker thinks the FCA regulation is the thin end of the wedge, and it would not be surprised if the regulators moved to protect gullible retail investors by imposing further advertising restrictions, gearing limits and more onerous suitability assessments.
“We believe this has been exacerbated by the losses retail clients incurred when the CHF [Swiss franc] gapped in January 2015, the collapse of a number of firms following this event along with the failure of Plus500 to operate appropriate client on-boarding procedures. We believe regulation is one of the key factors that will determine how the business and the industry will perform in coming years,” Numis said.