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In recent weeks we have had trading updates from some of the major players in margin trading. IG Group and Plus500 both posted updates in late April and that has elicited broker comment, with notes from Berengberg on Plus500 and RBC on IG Group.
Berenberg believes that Plus500 continues to show good momentum in Q2 2020 after what they call an exceptional Q1. And that the positive trends in both new customers, high levels of customer income and customer CFD trading performance, seen then, will also be a feature of the second quarter of 2020
For all that though, the German bank only has a hold recommendation on Plus500 shares with a price target of 1120p versus the current share price of 1289p, suggesting that the bank thinks the shares have run too far.
On the other hand, RBC or Royal Bank of Canada is much more upbeat on rival IG Group.
The bank has an outperform rating on IG’s shares and a price target 860p versus the current 787.5p. RBC has significantly raised its 2020 profit forecast for IG taking them +10% above the existing analyst’s consensus forecast for the stock.
RBC highlights the upswing in daily trading revenues that recent market volatility has caused. Noting that during the first 36 days of the final quarter of the financial year, IG posted revenues from financial spread betting and CFD trading that average out at £5.0 million per day.
RBC is looking for revenues of £3.0 million per day over the remaining 25 days of trading left in the quarter. that compares to a historic long-term revenue average for IG Group of £2.0 million per day.
Those numbers are quite something particularly when you remember that as of the end of the full year 2019, IG Group had only had three losing days over the previous five years!
Berenberg estimates that forex broker Plus500 should book Q2 revenues of US$ 294 million, an impressive number. However, they temper that by saying these excess gains are unlikely to be sustainable and use the example of the 2017/18 Crypto trading boom and bust. When Plus500 raised forecasts several times, in what was a record-breaking year. Only to find that this excess growth was unsustainable.
In essence, the bank is saying that though Plus500 is trading exceptionally well at the moment, markets are cyclical and therefore so is the profitability of margin trading companies.
In the tables below we compare the current broker ratings for IG Group, CMC Markets, Plus500 and GAIN Capital (owners of City Index). The shares of three out of the four are trading above their consensus price targets and in the case of Plus500 doing so by a margin of some 22.45 %. Only IG Group is trading below its consensus target price though by the slimmest of margins.
|Consensus Price Target||GBX 1,000||GBX 792||GBX 174||$6.00|
|% Upside from PT||-22.45% downside||0.70% upside||-14.56% downside||-5.81% downside|
|Rating Split||2 Sells 1 Buy 1 Hold||4 Buys 2 Hold||4 buys 1 Hold||2 Buys 1 Hold|
|Trailing P/E Ratio||9.56||19.47||23.41||5.35|
Data via marketbeat.com
We’ve also compared some valuation metrics and perhaps surprisingly, despite its share price being well ahead of analysts’ forecasts, Plus500’s stock is not on high PE multiple, when compared to its peers. In fact, the multiple is less than half that of IG or CMC.
Maybe that differential is about the quality and sustainability of earnings with the market believing that CMC and IG are better bets in that regard? But perhaps perception and reality are at odds here.
It’s clear that the current bout of market volatility has been good for margin trading businesses in terms of client activity and new accounts. The question is can any of them carry that forward into 2021 and beyond. The chart below is of IG Group’s share price both outright and in ratio to the VIX volatility index (in the lower chart) over the last 7 years. This suggests that margin trading companies share prices can rise sharply during periods of heightened volatility but that they tend to correct just as quickly thereafter.
IG Group has a trading update scheduled for the 4th of June with FY results expected on July 21st, whilst CMC Markets has full-year figures on June 11th.