B
Black Swan
Well, this is pretty embarrassing....
Spread better IG Group has taken a full write down of the goodwill associated with its Japanese business FXOnline — its biggest operation outside of the UK.
From a company press release :
"In the light of the significant adverse impact of these regulatory changes we have performed an impairment review of the carrying value of the goodwill and customer relationships associated with our Japanese business. As required by accounting standards we have based this impairment review on a forecast which assumed the continuation of the Japanese business’s cost-base as it stood at the period end, but with an assumption of reduced revenue..."
These assumptions result in the impairment of £123m in respect of goodwill and £20.1m in respect of the customer relationships.
Just to put that figure into perspective, IG paid £112.2m for a controlling 87.5 per cent stake in FXOnline back in September 2008.
So what are these adverse regulatory changes?
New leverage limits which have recently been introduced in Japan for forex, equity indices and other asset classes.
For example, from the start of August, leverage on FX was restricted to 50 times, while a limit of 10 times was introduced on equity indices at the start of this year. IG has previously been offering a mind boggling 100 times leverage! (Although, up to 200 times was until recently quite normal for the FX industry.)
And there’s more to come, IG has warned this morning.
"Our Japanese business operates in an increasingly difficult regulatory environment, with progressive leverage limits being introduced on trading in forex, equity indices, equities and other asset classes. As expected the introduction of a restriction on leverage to 50 times on forex from 1 August 2010 had an adverse impact on volumes across the Japanese forex industry. This resulted in a sharp fall in our Japanese revenue, although the effect was, at least temporarily, mitigated as some clients increased their activity in equity indices. This benefit was short-lived as, with effect from 1 January 2011, equity indices have been restricted to 10 times leverage, whereas we had previously been offering them with 100 times or more leverage. As a consequence, we have already seen a substantial reduction in our volumes on equity index trading. Leverage restrictions on other asset classes, including individual equities were introduced at the same time, but their impact is less material as the amount of revenue from these asset classes has historically been less significant. Overall we anticipate that the run-rate of revenue in Japan will now be roughly half what it was prior to the introduction of the first leverage restriction in August. There is one further scheduled leverage restriction to come into effect on 1 August 2011, when forex will be reduced to a maximum of 25 times leverage. We anticipate a further fall in revenue at that time."
The horrific trading in Japan — together with sluggish trading in the UK and Australia because of reduced volatility in the closing months of 2010 — means that full year profits at IG are likely to come in below market expectations if current trends continue.
And that’s not good for a stock which even after reduced earnings forecasts still looks expensive, says Peel Hunt’s Mark Williamson:
There is no denying that IG has stolen a lead in the UK and is making strong progress in some of its international markets, however its execution has not been flawless as eloquently highlighted by the situation in Japan and concerns should be growing that the US will not develop as hoped. Moreover, it is a business that requires volatility to drive revenue and that has been on a declining trend indicating that the Group is having to run increasingly hard to stand still. This fact has been acknowledged by the Group which has warned that in the absence of increased volatility that profits are unlikely to meet market expectations.
Consensus currently expects 2011 EPS of 34.15p, applying a 10% downgrade brings this to 30.7p indicating that the stock is currently valued at 16.9x earnings. Assuming a recovery in 2012 with earnings rising 14% to 35.1p still leaves the stock valued at 14.8x. We have consistently taken the view that the dependence on volatility to drive earnings and lack of forward visibility should mean that this stock trades on little more than 10x. Applying this to our 2012 EPS estimate above suggests a fair value of 351p, some 32% below the current share price and consequently we retain our sell recommendation.
Ouch!
Shares in IG were 29p lower at 489.5p
http://ftalphaville.ft.com/blog/2011/01/18/461571/igs-disastrous-japanese-foray/
IG Group Holdings Plc, owner of the IG Index financial spread-betting brand, had a first-half loss after charges against earnings for impairment of goodwill and customer relations in Japan due to restrictions on leverage.
The net loss was 80.4 million pounds ($128.2 million), or 22.31 pence per share in the six months ended Nov. 30, compared with a gain of 50 million pounds, or 13.84 pence per share, in the same period a year earlier, the London-based company said in a statement on the Regulatory News Service. Impairment charges included 123 million pounds for goodwill in Japan.
Japan curbed leverage on foreign exchange on Aug. 1, and on equity indexes on Jan. 1, moves which may halve Japanese revenue compared with before August, the company said today. Last month, IG said it would examine the value of its assets in the country.
“Since the period end we have begun work on a plan to significantly reduce our Japanese cost base,” Chief Executive Officer Tim Howkins said in the statement. “These cost reductions should ensure continuing profitability of this business, albeit at much lower margins than the rest of the group,”
December business was slower than expected, because market volatility was low, the company said. Customers tend to bet more in volatile markets.
“If activity levels remain similar to those seen recently, we expect profits to be slightly below current market expectations,” Howkins said
http://www.bloomberg.com/news/2011-...alf-loss-over-charge-on-japan-operations.html
Spread better IG Group has taken a full write down of the goodwill associated with its Japanese business FXOnline — its biggest operation outside of the UK.
From a company press release :
"In the light of the significant adverse impact of these regulatory changes we have performed an impairment review of the carrying value of the goodwill and customer relationships associated with our Japanese business. As required by accounting standards we have based this impairment review on a forecast which assumed the continuation of the Japanese business’s cost-base as it stood at the period end, but with an assumption of reduced revenue..."
These assumptions result in the impairment of £123m in respect of goodwill and £20.1m in respect of the customer relationships.
Just to put that figure into perspective, IG paid £112.2m for a controlling 87.5 per cent stake in FXOnline back in September 2008.
So what are these adverse regulatory changes?
New leverage limits which have recently been introduced in Japan for forex, equity indices and other asset classes.
For example, from the start of August, leverage on FX was restricted to 50 times, while a limit of 10 times was introduced on equity indices at the start of this year. IG has previously been offering a mind boggling 100 times leverage! (Although, up to 200 times was until recently quite normal for the FX industry.)
And there’s more to come, IG has warned this morning.
"Our Japanese business operates in an increasingly difficult regulatory environment, with progressive leverage limits being introduced on trading in forex, equity indices, equities and other asset classes. As expected the introduction of a restriction on leverage to 50 times on forex from 1 August 2010 had an adverse impact on volumes across the Japanese forex industry. This resulted in a sharp fall in our Japanese revenue, although the effect was, at least temporarily, mitigated as some clients increased their activity in equity indices. This benefit was short-lived as, with effect from 1 January 2011, equity indices have been restricted to 10 times leverage, whereas we had previously been offering them with 100 times or more leverage. As a consequence, we have already seen a substantial reduction in our volumes on equity index trading. Leverage restrictions on other asset classes, including individual equities were introduced at the same time, but their impact is less material as the amount of revenue from these asset classes has historically been less significant. Overall we anticipate that the run-rate of revenue in Japan will now be roughly half what it was prior to the introduction of the first leverage restriction in August. There is one further scheduled leverage restriction to come into effect on 1 August 2011, when forex will be reduced to a maximum of 25 times leverage. We anticipate a further fall in revenue at that time."
The horrific trading in Japan — together with sluggish trading in the UK and Australia because of reduced volatility in the closing months of 2010 — means that full year profits at IG are likely to come in below market expectations if current trends continue.
And that’s not good for a stock which even after reduced earnings forecasts still looks expensive, says Peel Hunt’s Mark Williamson:
There is no denying that IG has stolen a lead in the UK and is making strong progress in some of its international markets, however its execution has not been flawless as eloquently highlighted by the situation in Japan and concerns should be growing that the US will not develop as hoped. Moreover, it is a business that requires volatility to drive revenue and that has been on a declining trend indicating that the Group is having to run increasingly hard to stand still. This fact has been acknowledged by the Group which has warned that in the absence of increased volatility that profits are unlikely to meet market expectations.
Consensus currently expects 2011 EPS of 34.15p, applying a 10% downgrade brings this to 30.7p indicating that the stock is currently valued at 16.9x earnings. Assuming a recovery in 2012 with earnings rising 14% to 35.1p still leaves the stock valued at 14.8x. We have consistently taken the view that the dependence on volatility to drive earnings and lack of forward visibility should mean that this stock trades on little more than 10x. Applying this to our 2012 EPS estimate above suggests a fair value of 351p, some 32% below the current share price and consequently we retain our sell recommendation.
Ouch!
Shares in IG were 29p lower at 489.5p
http://ftalphaville.ft.com/blog/2011/01/18/461571/igs-disastrous-japanese-foray/
IG Group Holdings Plc, owner of the IG Index financial spread-betting brand, had a first-half loss after charges against earnings for impairment of goodwill and customer relations in Japan due to restrictions on leverage.
The net loss was 80.4 million pounds ($128.2 million), or 22.31 pence per share in the six months ended Nov. 30, compared with a gain of 50 million pounds, or 13.84 pence per share, in the same period a year earlier, the London-based company said in a statement on the Regulatory News Service. Impairment charges included 123 million pounds for goodwill in Japan.
Japan curbed leverage on foreign exchange on Aug. 1, and on equity indexes on Jan. 1, moves which may halve Japanese revenue compared with before August, the company said today. Last month, IG said it would examine the value of its assets in the country.
“Since the period end we have begun work on a plan to significantly reduce our Japanese cost base,” Chief Executive Officer Tim Howkins said in the statement. “These cost reductions should ensure continuing profitability of this business, albeit at much lower margins than the rest of the group,”
December business was slower than expected, because market volatility was low, the company said. Customers tend to bet more in volatile markets.
“If activity levels remain similar to those seen recently, we expect profits to be slightly below current market expectations,” Howkins said
http://www.bloomberg.com/news/2011-...alf-loss-over-charge-on-japan-operations.html
