real analysis8 Dec 2016 14:52
EPS downgrade for the year to May 2018 by 37.5% to 28.9p. Referencing the FCA assumptions regarding customer savings of 20-40% as a consequence of their leverage restrictions, this will likely 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%. Add to this the likelihood that less than 1% of IG customers (25% of revenue) will be able to be exempt due to professional status and the FCA implied revenue decline range falls to 9.3-18.6%.
Assuming revenue per customer declines 27.5% in both the UK and Europe and furthermore assuming that the 18% customer growth expected this year in the UK falls to zero next, then overall EPS forecast for this year remains unchanged but it declines 37.5% to 28.9p in 2018.
Expect IG to pay-out its guided 70% this year and given its balance sheet strength and the expectation of a return to good growth in 2019, assume the dividend is held until the cover is returned to target. Consequently IG will provide investors with a 6.7% dividend yield and it will be being valued at 16.8x 2018 earnings. IG is by far the best placed to manage the regulatory change with its historical focus on higher value customers where the CFD product is most appropriate.