Barclays feels spread-betting firm IG Group PLC (LON:IGG) has been harshly treated by the equity market and deserves a re-rating.
The broker has resumed coverage of IG with an “overweight” recommendation and a price target of 1,035p that is around two quid higher than the current share price.
“IG shares have fallen c7% since the tastytrade acquisition (vs the FTSE-250 +8%), and we believe this reflects concerns particularly about 1) trading conditions returning to normal and 2) a full multiple paid for tastytrade given cyclical risk,” Barclays said.
Barclays is expecting revenue per client in IG's 'Core Markets' will move back to pre-pandemic levels in the year ending 31 May 2022 (FY22) and reckons recent customer additions will help offset lower revenues this year.
“When combined with growth in 'Significant Opportunities', and consolidating tastytrade, we estimate EPS [earnings per share] in FY22 is c6% above FY20,” Barclays said.
The spread betting firm confirmed yesterday that the acquisition of online broker tastytrade has now completed.
Barclays said the price paid is “optically high”, with the enterprise value (market capitalisation adjusted for debts and cash balances) high at 19.5 times annual earnings before interest and tax (EBIT) but Barclays’ EBIT forecast has this multiple falling to 11 in FY22.
“In FY23, we assume a slowdown in the US options and futures market's growth rate, but with market share gains, we assume tastytrade FY23E EBIT of £84mln, 2.2x higher than Dec-20. We recognise cyclical concerns, but if IG can hit our forecasts, we believe the shares are very attractively valued,” Barclays said.
The stock is currently trading on less than 12 times annual earnings and generally, that only happens during periods of material regulatory uncertainty.
“Regulation is an ever-present risk for IG, but the acquisition diversifies risk, in our view. IG's total addressable markets (TAM) have also increased post the tastytrade deal, and the management team has a strong track record of having an innovative and disruptive approach,” Barclays declared.