Spread your volatility bets

Published on Tuesday 9 June 2009 21:02

Scrutineer

IG Group

242p +24.25p

THERE's stock market volatility, and there's stock market volatility. Traditionally, publicly-quoted spread betting firm IG Group thrives amid volatility as speculative betting on currencies, commodities, interest rates and indexes takes off.

But sometimes it doesn't work like that. In the volatile markets we have been having, new spread-betting competition tends to come out of the woodwork and that impacts on revenues and margins.

IG Group jolted the market for this reason with a pretty negative update in its third trading quarter to March, when it said revenues in the UK and Australia were under the cosh due to increased competition.

It hit the group's shares significantly at the time. But in its latest trading update yesterday IG revealed it had picked itself up, dusted itself down and picked up its pace.

Revenues in the UK and Australia in the final quarter of its trading year to end-May recovered by 9 and 12 per cent respectively.

Shares in the group were rewarded with a 10 per cent boost yesterday. IG had a double-edged message, however.

As things return to normal, and the group benefits from market volatility rather than being pressured by competitors, IG said yesterday that the first half of 2010 will be tough given the high comparative levels of volatility in the first half of this year.

Confusing, I know. But the general picture appears to be a positive one: if IG can fend off the depredations of rivals offering lower spreads in the short term, its brand name will benefit from broad volatility as always.

There were some other positives out of yesterday's update from the company that helped the share price as well.

One was the sharp revenue growth at IG's newest overseas offices (even if from a low base).

Aggregate revenues in Singapore, Germany, France, Spain, Italy and the US rose to 42 million from 9.7m.

Secondly, the company revealed it had sharpened up its act on bad debts. IG said a more rigorous approach in managing credit risk meant that debts as a proportion of revenue in the second half are expected to be below 3 per cent of revenue. That compares with 12 per cent of revenue in the first half. In addition, client account openings are surging.

IG said that, during the year, 74,000 spread-betting accounts were opened compared with 42,000 in the prior year.

As retail investors in particular still look askance at investing in individual equities given the wide disparities in performance at the minute, it could be that volumes will continue to do better among market professionals investing in a wide variety of broader sectors (witness the big increase in trading in exchange traded funds) as well as spread betting.

As a result of all this, IG's shares, after a period of, er, volatility, look a buy again.

CONTRA-thinking or just ahead of the curve?

Britain's previously bombed-out commercial property market (just ask HBOS) is benefiting from a nascent return of confidence, according to a new note from Standard Life Investments.

SLI says property valuations may have further to fall in this cycle before they can be described as 'fair value', but that, over a three-year timeframe, property returns are likely to outrun cash.

With interest rates where they are now at a historic low of 0.5 per cent, that is not an overly ambitious claim.

The other weakness is that a lot of investors' timeframe currently in the downturn is rather less than three years.

However, SLI's take is still intriguing, particularly as it says the UK commercial property market is furthest into the cycle.

SLI says shrewd investors should now be tracking various "triggers" that would point to an eventual bounce in the sector.

The fund manager cites four touchstones, in particular. Transaction prices in the commercial property industry; improvements in liquidity; better investment flows; and, not least, performance of the publicly-quoted real estate market.

However, one would hope to anticipate the recovery before property stocks rise.

As legendary James Goldsmith once said: 'When you hear the bandwagon, it is too late.'

Interestingly, SLI says UK investors could benefit from the UK's practice of monthly commercial property valuations, compared with much less frequent updates in many other countries.

Anne Breen, head of property research at SLI, says that while these monthly valuations exposed the excesses in the sector earlier than many in 2007 they could now, conversely, "begin to give confidence to those investors looking to re-enter the market at the bottom of the cycle".

Major cash call ends any Bowleven funding fears

SCOTS STOCKS

AFTER weeks of speculation that it would issue millions of shares, oil explorer Bowleven expanded its capital by 122 per cent yesterday, selling 106 million shares at a 9 per cent discount to its opening price.

Evolution Securities said the 71 million placement would "alleviate funding concerns and allow investors to re-focus their attention on the underlying assets". However, the firm still fell on the prospect of new shares flooding the market, closing down 6.25p at 67.5p.

Aberdeen-based Ramco Energy rose 3 per cent to 67p despite posting a 3.4m loss – after it reported progress in its wind farm and oil service businesses.

Semiconductor maker Wolfson Microelectronics fell 2 per cent to 111.25p after revealing that its parts had not been included in the latest version of the Apple iPhone, which was unveiled this week.

John Menzies, the Edinburgh-based logistics company, rose 2.7 per cent despite the departure of its charismatic head of news distribution, Ellis Watson. Shares closed up 3.5p at 133p

Robert Wiseman Dairies dropped 1 per cent to 377.25p after finance director Billy Keane sold 20,000 shares.

Angel Biotechnology, the Edinburgh life science minnow, rose 13.3 per cent to 0.56p after announcing a new contract to manufacture stem cell products with ReNeuron.

Stage set for a brighter future at drama company

SMALL BUT BEAUTIFUL

STAGECOACH Theatre Arts, the Aim-listed children's drama company, yesterday said it expected pre-tax profits to be "in line with market expectations".

The company provides part-time performing arts education at more than 700 schools in the UK using a franchise network. Each week, more than 40,000 children attend drama classes run by Stagecoach.

Financial results for the year to 31 May are due on 5 August.

The board expects to report "encouraging signs for future growth" at Stagecoach Germany and in other overseas markets.

Expectations of overseas success follows January's announcement that Stagecoach USA had moved into profit for the first time.

Back in the UK, Stagecoach expects to report an increase in continuing franchise fees from existing schools, which will compensate for fewer than expected new school openings during the year.

The company, which has a market cap of about 5 million, said: "This reduction in new sales was a consequence of the recent credit conditions, which limited the availability of bank finance to existing and potential new franchisees.

"Stagecoach Theatre Arts continues to monitor such credit conditions carefully and would hope to benefit from any upturn in this area as the wider economy begins to recover."

The company was launched in Surrey in 1988 and joined Aim in December 2001.

Neil Veitch of SVM

ONE TO WATCH

GKN

132.25p +9.5p

Scotsman says BUY

GKN provides systems and components to the automotive and aerospace industries. In automotive (67 per cent of revenue), GKN is a global leader in a number of niche markets. The firm's aerospace division (33 per cent) supplies engine components and airframe systems for the US military and Airbus.

Concerns over the company's debt levels and earnings outlook recently caused GKN's stock to reach a 20-year relative low against the FTSE All Share index. However, we believe the shares are now attractive. Despite having net debt in excess of 700 million, GKN's balance sheet liquidity remains strong. It still has about 500m in undrawn committed credit lines available and has no significant debt repayments due until 2012.

In addition, it would require another sizeable decline in earnings from these already depressed levels for the group to be at risk of breaching its banking covenant. Management has also been aggressive in restructuring the company and is targeting 190m of savings by mid-2010. Alongside reductions in staff and the introduction of short-time working, it has reduced capital expenditure by 40 per cent, ceased dividend payments and taken steps to manage working capital. While we believe GKN doesn't require a rights issue, should one occur we believe it will be well received by the market.

GKN's share price has recovered somewhat from its recent lows, but we still consider the company to be undervalued. Given the de-stocking in the automotive industry exhibited over the previous year and the raft of government incentive packages encouraging the purchase of new cars, we expect news flow in the sector to become increasingly positive. GKN will prove to be one of the main beneficiaries.

&#149 This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.