The UK consumer is under pressure due to higher mortgage, food and energy costs. Then there’s the tightening of lending, lower levels of equity withdrawal from property and rising borrowing costs on credit cards. So what does this mean?
IG Group (IGG), rated a BUY by The Daily Telegraph
Well, as households cut back, consumer-facing stocks are inevitably feeling the pain. On the front line were sofa retailers SCS Upholstery and Land of Leather, which have seen revenues drop off a cliff. Then before Christmas the leisure sector was hit, with the likes of Clapham House and Enterprise Inns falling back. More recently it’s been the turn of fashion house Burberry, jeweller Signet and high-street favourite Marks & Spencer to feel the pinch of tighter spending.
So who’s next? To be honest, any product or service not considered essential (such as luxury holidays), or where premium prices are difficult to justify (such as branded goods), looks vulnerable. Nervous fund managers have therefore been piling into sectors perceived as defensive, such as utilities, tobacco and alcohol.
Another area that is often considered non-discretionary is gambling. Pundits argue that in a downturn, betting is one of the last things that loyal customers forego. But even though I agree to some extent, I’d be very surprised if it remains unscathed, assuming the slowdown gets worse before it gets better.
Hence my concern about IG Group. It is the UK’s largest spreadbetter, quoting prices on a broad range of stock indices, CFDs, currencies, commodities and individual equities. Last week it reported a 63% rise in first-half pre-tax profit of £48.2m, on the back of spiking volatility and rising numbers of punters wishing to bet on financial products. But while “current trading is strong”, how sustainable is this growth? Its clients tend to be well-heeled professionals with savings of more than £10,000, and so are undoubtedly more resilient to a downturn than the average consumer. But even their fortitude will be tested, especially as they each generate around £2,000 of income for IGG every six months.
Also, in a sector where profit margins are rich at more than 50%, then I’d expect more competitors, along with CMC and City index, to muscle in on the action. In fact, established bookmakers such as Ladbrokes, Paddy Power and Betfair are already doing so, which could not only crimp IGG’s future growth rates, but also push up client acquisition costs.
As for the numbers, analysts expect 2008 sales and adjusted earnings per share of £167m and 19.2p respectively, putting IGG on a forward p/e ratio of 16.7. That’s not too expensive, but I’d still advise caution given the economic backdrop.
More to the point, if you wish to invest in gambling (which I would avoid at present), then better value may be found in Ladbrokes and William Hill, whose shares trade on p/e multiples of 8.6 and 8.1. IG’s chief operating officer, Peter Hetherington, sold one million shares at £4 each back in October.
Recommendation: TAKE PROFITS at 330p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments