The European arm of Royal Bank of Canada, RBC Capital Markets, has published a research note on spread betting broker IG Group and the bank’s analysts like what they see.

What is RBC saying about IG Group?

RBC’s base case is that IG Group is fundamentally undervalued at its current level, the shares were trading at 794.50p when RBC published its note, the bank has reiterated its outperform rating and raised its target price to 1100p, from its prior forecast of 1075p.

RBC analysts point out that, on their calculations, IG Group is trading on a PE of 9.0 times FY 2022 earnings, and this lowly rating makes them attractive.

Though is worth pointing out that both CFD brokers CMC Markets and Plus500 are trading on considerably lower PE ratios than IG Group currently.

Does RBC identify any other potential upsides?

RBC’s bullish call isn’t just based on earnings, because it also believes that the are other opportunities for investors in IG Group stock,  for example, within market volatility and uncertainty in Q4, which should boost trading volumes and therefore revenues.

It also points to the possibility of special returns for shareholders in FY 2023.

Suggesting that the £165.0 million of capital headroom in the balance sheet could mean that the sale proceeds, from the disposal of Nadex and the company’s stake in Small Exchange, may be returned to share shareholders.

Most likely through a special dividend, which could take the capital return (or dividend) yield of the company to 9.40% over the next 12 months.

I wonder if there is as much capital freedom in the balance sheet as RBC believes, and whether it might not be prudent for IG to retain some additional liquidity as a buffer against rising margins and tightening credit lines, that events such as the war in Ukraine and Western sanctions may create.

Are there any causes for concern?

RBC also tackles the thorny question of Tastytrade.

In its recent revenue update, IG Group effectively warned on earnings in the newly acquired US business, and that was disappointing to many including myself.

After all, IG paid $1.0 billion in stock and cash to own the options broker and educator.

Cutting revenue forecasts this early in their ownership of the business could make one think they had dramatically overpaid.

However, RBC takes the view that the issues with Tastytrade are now baked into the IG Group share price.

Over the last 52 weeks, IG Groups’ Stock has fallen by -5.83%, whilst Plus500 has seen its share price climb by +8.89% in that time frame, suggesting that the market had anticipated some indigestion from Tastytrade.

For FY 2022 RBC is looking for a +12.0% increase in group revenue at IG, +6.0% growth in FY 2023, and just +2.0% in FY 2024.

Figures that perhaps reflect the cyclical nature of the margin trading business.

Reading between the lines then, RBC sees a window of opportunity in the IG Group share price, over the next 12 to 18 months, but reversion to the mean thereafter.

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