IG Group first half results – Revenues up 8%, outlook strong, but profit will be hit by Swiss Franc


IG Group Holdings plc (LON:IGG) has released its complete financial results for the first half of fiscal 2015 (IG has a May 31 year end). The results follow, and can also be seen here.

We already reported that IG said the results will include record quarterly revenues for its fiscal Q2 (ended November 30, 2014).

More analysis will be forthcoming, stay tuned to LeapRate.

IG Group Holdings plc (“IG” or “the Group”) today announces results for the six months ended 30 November 2014. 

Operating and Financial Summary:

  • Strong first half results following a very subdued first quarter
  • Net trading revenue(1) up 8% at £197.4 million
  • Profit before tax up(2) 2.8% to £101.4 million
  • Diluted EPS up 5.4% at 21.44p
  • £87.4 million of own funds generated from operations, up 10.5%
  • Interim dividend of 8.45p per share, 30% of 2014 full year dividend
  • Execution only stockbroking service launched in the UK; planning international roll-out
  • Swiss office commenced operating in October; Dubai licence application progressing well
  • Launched IG Major Markets mobile App, aimed at improving client acquisition

Tim Howkins, Chief Executive, commented:

“IG delivered another very strong set of results, with record revenue in the half year after a subdued first quarter.  We also made good progress with our ongoing investment in strategic initiatives designed to drive future growth, including the launch of stockbroking in the UK and the opening of a new office in Switzerland.

In November we celebrated IG’s 40th anniversary.  It was a great pleasure to be joined in those celebrations by a number of clients who have been active with us for a large portion of those 40 years.  In what has recently become a very challenging time for the industry, IG’s strong financial position and commitment to service should provide both existing and new clients with reassurance that we remain the number one trading partner.

I believe that the initiatives we are embarked upon provide clear evidence that, after 40 years, our ambition to drive forward and develop the business is as strong as it has ever been.”

(1) Net trading revenue is trading revenue excluding interest on segregated client funds and is presented net of introducing partner commissions. All references to ‘revenue’ in this statement are made with regards to net trading revenue.

(2) A change in accounting treatment means there is no FSCS levy charge in the first half of the 2015 year, with the full annual charge now being incurred in the second half. The prior year period has been restated.

All current financial results listed are for the six months ended 30 November 2014.  All general references to ‘the prior period’, ‘the prior year’, and ‘last year’ mean the six months ended 30 November 2013, unless otherwise specified.

Financial Summary:

IG 1H results

 

All market share data has been provided by Investment Trends Limited

– Investment Trends UK Leveraged Trading Report October 2014

– Investment Trends Australia CFD Report September 2014

– Investment Trends Singapore CFD and FX Report November 2014

IG is a global leader in online trading, providing fast and flexible access to over 10,000 financial markets – including shares, indices, forex, commodities and binaries.

Established in 1974 as the world’s first financial spread betting firm, IG’s aim is to become the default choice for active traders globally. It is already an award-winning multi-platform trading company, the world’s No.1 provider of CFDs* and a global leader in forex, and it launched an execution-only stockbroking service in the UK and Ireland in September 2014.

It is a member of the FTSE 250, with offices across Europe, Africa, Asia-Pacific and the US, where it offers limited risk derivatives contracts via the Nadex brand.

*Based on revenue excluding FX, published financial statements, July 2014.

Chief Executive’s Review

IG delivered revenue in the first six months of £197.4 million, 8% ahead of the same period in the prior year.  A subdued first quarter this year was followed by a significantly more active second quarter, as reasonably volatile financial markets presented clients with considerably more trading opportunities.  During the period, we set a number of revenue records, with the highest half yearly revenue, the highest quarterly revenue in the second quarter and the highest monthly revenue in October.

Encouragingly, revenue in the more mature markets was well ahead of the same period last year, with the UK up by 14.3% and Australia up by 6.6%, as our large installed client base in these regions responded strongly to the increased volatility.  In the Rest of World, revenue in the six months was down by around 3%, although it did recover significantly in the second quarter, as client forex trading activity picked up significantly.

Overall the performance in Europe was weaker than anticipated.  Although first half client numbers grew by 9%, revenue was only fractionally up.  A very weak first quarter was followed by a better second quarter when we achieved 10% growth in both revenue and client numbers against the prior year.  Growth rates varied from country to country depending on asset-class mix and economic backdrop, with our German and French offices feeling the impact of some deterioration in their economies.  We also believe that growth of our European business is being held back by weak client conversion rates, particularly on mobile devices; I discuss in more detail below how we are addressing this.  Additional detail on country performance is given in the Operating Review.

On 15 January this year, the Swiss National Bank announced that it had ceased intervention in the exchange rate between the Swiss franc and the Euro, with immediate effect.  This caused a sudden extreme appreciation in the value of the franc, accompanied by a lack of market liquidity which lasted several minutes.  This resulted in a negative financial impact for IG which will not exceed £30 million, from a combination of market (£12 million) and client credit (£18 million) exposure.  While this was due to an unprecedented and unforeseeable degree of movement in a major global currency and only a few hundred clients were affected, we will seek to learn lessons from this incident which we can incorporate into our risk management approach going forward.

Mobile and web developments 

The use of mobile apps has continued to grow, with an increasing proportion of our clients considering this to be their primary method of interacting with IG and the financial markets.  Our existing mobile apps, which we continue to develop actively, are extremely feature-rich and provide powerful trading and research tools for the experienced client.  However, they were not designed to attract new clients or to appeal to those who simply want to find out more about IG and its products; therefore, for some of this audience the apps can be daunting, if not off-putting.  As a result, our rate of conversion of app downloads into trading clients is currently poor, and this is an increasing challenge as the proportion of prospective clients coming via mobile grows; this has undoubtedly contributed to the recent weakness in Europe and elsewhere.  However, improving the rate of conversion on mobile devices also provides us with a significant opportunity.

Towards the end of our last financial year we established an operation in Eastern Europe where we are developing a new suite of mobile apps, better suited to prospective and new clients.  We are currently building the necessary marketing skills and infrastructure to drive app downloads and conversion.  The first of these new apps, IG Major Markets for the iPad, was released in the UK in early December.  Over the next six months we will be releasing similar apps for the iPhone and android phones and tablets and rolling them out internationally.  We will be iteratively developing the features of each of these apps as we learn from user behaviour and feedback and as we develop and refine the tools needed to drive increased engagement and conversion.  Over time we expect these apps to have a progressively positive impact on account opening across all our geographic regions.

We have been successful in our application for seven generic top level domains (gTLDs) relevant to our business; .forex, .markets, .broker, .trading, .CFD, .spreadbetting and .Nadex.  This positions us well to take advantage of possible broader changes to web usage and search engine ranking which might result from the large number of new gTLDs.  As the first stage of a project which is likely to last a number of years, we are now working through the process necessary to launch our gTLDs.  We anticipate launching a number of websites with these domain suffixes, in support of our broader strategy to position IG as the default choice for active traders globally.  We also expect to commence external sales of domain name licences over the next year, utilising the proceeds of these sales to finance the development of the IG sites, as we seek to make some of these gTLDs synonymous with the products they represent.

The Group continues to see opportunities to grow the size of the client base through geographic development, both within and outside of the current footprint and through product development and diversification.  Over the period we continued to make good progress on both fronts, most notably with the launch of Stockbroking in the UK and the opening of our office in Switzerland.

Geographic development

We received our banking licence from the Swiss regulator in September and launched the office in Geneva in early October.  It is too early to provide a detailed update on progress, but to date it is developing in line with our expectations and in line with what we have seen in the past, where a new office is concerned.

We are making very encouraging progress with the Dubai Financial Services Authority on our licence application there.  We are now completing the recruitment of staff and fitting out our office in Dubai, and we continue to anticipate launching there towards the end of this financial year.  Localising the offer for Dubai has presented some new challenges for IG, but the team has responded exceptionally well to these challenges.

We continue to have dialogue with regulators and potential partners in other countries as we explore ways to further extend our geographic reach.  We are in discussion with a number of such parties in China.  These discussions are varied in nature and at an early stage; so it would be premature to predict whether any of them will come to fruition, or to estimate the scale of opportunity that they represent. While China is clearly an interesting market for us and a real breakthrough here could be significant for IG, we do not underestimate the current complexities of the regulatory environment with regard to our product set, and we anticipate that matters will develop slowly.

Product development

During September we reached a key milestone on our journey to become the default choice for active traders, as we successfully launched our stockbroking business in the UK, with a broad range of UK, Irish, US and European shares, ETFs and ETCs and a tax-efficient ISA wrapper. Stockbroking will form an important part of our comprehensive share-trading offering, and is aimed both at opening up a new revenue stream for the group and increasing the size of the target market for our current business.  At the end of November we enhanced the offering by giving clients the ability to use their share portfolio as collateral to support their shorter-term trading with CFDs or spread betting. We anticipated that initial take up would be slow and steady; however we have been encouraged by the number of early sign-ups and pleased with the proportion of these that has come from new clients.  After three and a half months, we had around 1,700 clients who had opened and funded a stockbroking account, with over 60% of the applications having come from new clients.

As we develop our stockbroking offering we will pay particular attention to providing features and a pricing structure which will help to cross-sell our other products to stockbroking-only clients.  Although it is very early in the life of our stockbroking offering, we have seen evidence already that a proportion of clients who start as stockbroking clients do then move on to also trade with our other products.  For those new clients who began with stockbroking in September, around 28% had gone on to trade with a leveraged product by the end of December.

As we go through 2015, we will commence a selective international roll-out of stockbroking and we would expect to launch it in at least two countries over the course of the calendar year.

40th Anniversary

In November we celebrated IG’s 40th anniversary. It was a great pleasure to be joined in those celebrations by a number of clients who have been active with us for a large portion of those 40 years. Over this time, I believe we have clearly demonstrated the robustness of our business model and our ability to grow and evolve our business as markets and technologies change and against a wide range of market and economic backdrops.  I believe that the initiatives described above provide further clear evidence that, after 40 years, our ambition to drive forward and develop the business is as strong as it has ever been.

Dividend

As we announced in July 2014, the Board decided to increase the ordinary dividend pay-out ratio to 70%, reiterated its progressive dividend policy and established a formulaic approach to the interim dividend each year, such that it is calculated as 30% of the full year ordinary dividend for the prior year. Accordingly, we have declared an Interim dividend of 8.45p.  This is up 47%, for two reasons.  Firstly, the increase in the pay-out ratio last year was recognised entirely in the final dividend, meaning that last year’s interim dividend was calculated on the basis of the previous lower pay-out ratio. Secondly, we have increased to 30% the proportion of the total annual dividend which is declared at the interim point in the year, where historically this was approximately 25%.

Current trading and outlook

As is often the case, the record month in October was followed by a subdued patch in November.  The second half then began with an unseasonably strong December.  Client activity levels rose again as a number of news stories drove sharp movements in financial markets and presented a range of trading opportunities.  These heightened activity levels continued into January.  At the revenue level, this upside was then negated by the impact on the Group of the sudden movement in the Swiss franc in the middle of January.  At this stage, IG remains on track to meet revenue expectations for the year, although profit and earnings will be negatively impacted by client debts associated with the Swiss franc movement.  If full year diluted earnings per share were to be lower than last year purely because of this highly unusual event, the Board’s current intention would be to maintain the full year ordinary dividend at last year’s level.  Obviously the Board’s final decision would take into account all relevant factors at the time.

Tim Howkins

Chief Executive

20 January 2015

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IG Group first half results - Revenues up 8%, outlook strong, but profit will be hit by Swiss Franc

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