Cube UK Report (21 Jan 2021) – Tasty acquisition at IG
Good morning folks,
A very busy morning today, with lots of RNS’s. I’ll give you my quick take on what has happened.
- IG Group
- AJ Bell
- Ten Entertainment
- Stock data should display here.
|Market cap||£3.3 billion|
|Writer disclosure||Long IGG.|
What a day for IG news. Interim results and a very big acquisition.
The share price dipped from the open – an acquisition of this size is nearly always more likely to worry than to excite, at least in the short-term.
Anyway, let’s check out the results for the six months from June to November:
- net trading revenue +67% to £417 million
- PBT +129% to £231 million
- active clients +55% to 238,600, after the number of new clients more than doubled
- dividend: unchanged
Growth seems to be across the board, including both “Core Markets” and “Significant Opportunities”.
The company says “new client retention rates are comparable to historical averages”, but perhaps it is too soon to be sure about the quality of new clients?
Here’s the financial summary. As a shareholder, it’s nice to see operating costs increasing by just 22% – controlled growth in the face of enormous revenue growth.
As a customer, however, I’ve found it impossible to get through to their phone line on the last three occasions I’ve rung them. Either I’ve run out of time (after waiting for 45 minutes or an hour), or else they have answered but not spoken to me.
Reading their forums, I’m not the only one who has found it impossible to get through to them this year.
The upshot has been that I’ve given up on trying to get through to them, and I’ve signed up for accounts with two new brokers, instead.
I needed new broker accounts anyway, because IG has lost the ability to provide Share Dealing services to EU customers.
But on top of that, the spreadbet trade that I wanted to do with IG (on Tesla options), is now in doubt. I’m not sure if I’ll try calling IG again, or if I’ll place the trade with a different broker, instead.
That’s my personal anecdote in relation to IG, and my conclusion is that they have struggled to hire the staff to deal with all of their new customers.
Alternatively, maybe they are happy enough with the current situation, because taking phone calls from most of their customers isn’t profitable enough? I know that other brokers can sometimes be very slow to answer the phone, too.
June Felix talks about the “step change in client numbers and client trading”, which has been aided by the very high volatility this year.
She mentions adverage daily trading volumes at twice the levels of prior period. When you think about that, the outages which occurred are more understandable.
Her background is in payments technology, and she sees IG as a financial technology business. I continue to have a pretty good impresion of her leadership.
The growth strategy already looks out of date. There’s no need to think about a 3-5% revenue growth target when market volatility sends revenues soaring.
I also note that target for FY 2022 revenue of £160 million from “Significant Opportunities”. In H1, it has just generated £76 million. So not much additional revenue needed for next year, if it can just keep up some forward momentum.
In relation to these “Significant Opportunities”, IG mentions that it has seen 160% growth in Japanese Twitter followers.
I’ve checked, and this is indeed a decent Twitter account, with 43.6k followers as of today:
No major bombshell in the outlook statement. If volatility reduces, trading activity and client acquisition will reduce. The various investment programmes will continue.
What’s really insteresting is the acquisition. Time to talk about that:
Proposed Acquisition of Tastytrade
Here’s the separate RNS announcing the acquisition.
Tastytrade is described as “a high growth US online brokerage and trading education platform with a leading position in US listed derivatives, primarily options and futures, and over 105,000 active accounts“.
We can get an extremely rough idea of the current value of an active client with the following calculation:
- IG market cap £3.3 billion for 238,600 active clients: £13,830 per client.
- Tastytrade $1 billion valuation for 105,000 active clients: $9,520 per client (£6,950)
(Clearly, growth rates and many other factors are at work here, but I just wanted to get some idea of what this result would be.)
With Tastytrade’s existing customer base being valued much lower than IG’s, despite being a “high growth” business, I’m going to assume that Tastytrade’s customers are on average less profitable.
The Tastytrade homepage is very casual, there is a big emphasis on “infotainment”, and it seems to be pitched towards people who start with zero knowledge about trading, so this makes sense to me:
Payment – $300 million in cash, $700 million in IG stock. That’s 61 million shares – dilution of 16%. Tastytrade shareholders will own c. 14% of enlarged group. Tastytrade senior management join IG.
Rationale – to get a foothold for IG in the US retail options and futures market, where there are 1.5 million retail traders.
Here’s the info on Tastytrade:
- For the financial year to 31 December 2020, tastytrade delivered revenue of $116.2 million (up 44% year-over-year; 31 December 2019: $81.0 million)
- Adjusted EBITDA of $54.1 million (up 43% year-over-year; 31 December 2019: $37.8 million)
- profit before tax of $49.0 million (up 5% year-over-year; 31 December 2019: $46.5 million)
- growth in active accounts of 85% over the same period, reflecting both structural sector growth and tastytrade’s continued disruption of the US retail market.
- tastytrade’s gross assets were $200.5 million as at 31 December 2020, with a regulatory capital requirement of c. $0.5 million reflecting its agency-only brokerage model.
I’m glad to see that it’s profitable, and that the multiple paid isn’t ludicrous.
Using year-end numbers, I get revenue for Tastytrade of $1,106 (£806) per active client. This calculation is very muddy, because the client base nearly doubled during the year.
The equivalent calculation for IG suggests £1,748 in revenue per active client (and IG discloses revenue per OTC leveraged client of £2,159, with lower numbers from other types of clients).
I think I can safely say that IG’s customers are much more profitable (for IG).
IG says that US equity options have grown at a CAGR of 24% from 2017 and 2020.
The number of options and futures trades more than doubled last year.
This is a key sentence in the rationale:
Combines IG’s market-leading presence in the leveraged OTC space with tastytrade’s highly complementary expertise in the exchange traded options and futures market, enabling IG to offer a broader suite of derivatives products to clients.
There will be “no significant or complicated integration required, minimising integration risk and associated costs“.
I wish I could give this the thumbs up, but I’m nervous.
Much of the reason I’ve been a happy shareholder in IG is my understanding that it looks for high-quality clients who will remain with the company for years. By avoiding excessive churn, it has a more predictable core customer base.
I worry that it is buying an American firm at the exact moment when the American retail trader market is euphoric, riding on the wave of the biggest bull market in history.
Many of the people trading options and futures right now shouldn’t be trading options and futures, and they wouldn’t be, if markets hadn’t gone crazy.
If the market collapses in the next few years, many of these people trading “for fun” will realise that the boring ways of making money aren’t so bad.
And even if this deal requires little integration, it will surely be a huge distraction for the entire management team and the Board.
Unfortunately, I think my relationships with IG – as a customer, and as a shareholder – might be coming to an end in the next few months. I’ll have to reflect on it some more.
Q4 Trading update – formerly GVC, this sports-betting/gaming group reports 41% growth in online net gaming revenue (NGR), offset by the predictable collapse of retail revenues (e.g. Coral, Ladbrokes).
The end product is a 7% increase in Q4 NGR for the entire group.
Full year 2020 Group EBITDA3,4 expected to be in the range of £825m – £845m, as announced on 7 January 2020 despite the impact to profitability from enforced retail closures
Leadership changes – in a separate RNS, the company announces a new CEO appointed from the Board of Directors.
I don’t have a strong view on this company and have lots of other announcements I want to quickly mention, so I’ll move on.
Q1 trading update – excellent numbers from this investment platform, as required given the growth rating on the stock.
Customer numbers are up 30% over 12 months, 6% over the quarter.
I’m starting to really worry about a market top. So I am thinking about how I might possibly get prepared for that, with my portfolio. Buying shares in a company like AJB would not be part of the plan.
I would call this a group of bowling alleys, but it calls itself an operator of 46 “family entertainment centres”.
Bowling alleys have sadly been closed again, and the numbers here are as you would expect – terrible.
Total sales for the year down 56.9%, like-for-like down 17.4%. Centres were closed for “49% of the available time“.
After an equity fundraise, the company ended the year with £12.4 million of liquidity headroom, which the company says would allow it to remain closed for “at least another 8 months”.
It announces today that there’s a further £14 million available in CLBILS from RBS.
My view – I have nothing against this company in particular, but I wouldn’t be tempted to invest. It’s only trading 10% lower than the level it was at 18 months ago – does that make sense?
Trading update and IP acquisition – this video game group reports performance “ahead of the Board’s expectations“.
It has been a great time to be delivering home entertainment of all forms, and video games are included in that.
It’s very excited about the 2021 pipeline, too:
Worms Rumble and Overcooked: All You Can Eat on more platforms, Rogue Heroes, The Unliving, Epic Chef, Super Magbot, Greak: Memories of Azur, Honey I Joined a Cult, Hokko Life, a number of unannounced games alongside Hell Let Loose to exit Early Access and the announcement of additional platforms to support.
There’s also the £12 million acquisition of a multiplayer golf game (for context: total market cap is £1.1 billion).
My view – I note analyst forecasts for FY 2022 net income sitting around £28 million. Even if they are beaten by a wide margin, there’s a lot of further growth baked into the price here.
It’s a nice company, and I always enjoyed playing Worms. The games catalogue is attractive. And the company’s growth track record in recent years is excellent.
My problem is that I don’t think these are premium games. Activision Blizzard ($ATVI) is available at a much cheaper multiple, and their portfolio includes World of Warcraft and Call of Duty. Why wouldn’t I invest there, instead?
Trading Update – an excellent beat of market expectations announced here for H2. It has crushed the trading it achieved pre-pandemic:
“…the Board is pleased to report that it now expects to report revenue of approximately US $88.0m for the Period, significantly ahead of market expectations of US$ 80.0m, and annual adjusted EBITDA of approximately US$ 26.0m, also significantly ahead of market expectations of US$ 21.0m.”
Those are annual figures, and the market cap equates to c. $287 million.
A lovely turnaround for anyone who back the company during the March 2020 Covid crash, or indeed for anyone who took the plunge before then, when it was struggling in the middle of 2019.
Management are cautious for future financial results, which is not unusual for them. They tend to be conservative, and with lots of spending planned this year, this may explain why the share price has not reacted more strongly today:
…the Company expects to report a meaningful increase to operating costs alongside typical inflationary cost increases in the Company’s operations in 2021. Although the Board expects modest financial growth in the coming year, this net investment will temper our profitability in 2021, but the long term-growth opportunity from new products is substantial and the business is in a good position to be able to make this investment now, in order to realize the benefit in future years.
My view – a nice company, with arguably unique floor-levelling construction products. Has proved the doubters wrong.
Revenues down from £4.38 million in H1 last year, to £3.12 million.
Within this, graphene-related sales reach £0.35 million (almost nothing last year).
Loss of £4.34 million, cash left of £2.5 million.
No idea why this is still valued around £100 million. Graphene is supposed to be the exciting bit.
That’s it for today, folks. Cheers!
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All the best