On to another investment – London Capital Group.

These are a spreadbetting company – like IG index – only smaller, much, much smaller.  In fact they only have a market cap of £18m.  My forecast net profit in 2013 is about GBP 0.5m – as ever with my forecasts this is very conservative.  I get it by taking Net income at the half year and adding net income from continuing ops.  I am including £1.8m IT costs for platform change in this and FOS claims charges – again doubled.

Being less conservative gives Income of £1-2m – assuming that the IT platform changes bring about no benefit. So the company trades at a PE in a range of 36-9X depending on what you count.

PE of 36 – not so cheap.  However looking at the balance sheet the company is backed up by £20m of tangible assets – if the company was wound up.  These are tangible cash / receivables, exclude intangibles.  So from a certain perspective the company is free.  If the management decide tomorrow that spreadbetting really isnt their thing and to wind the business up you get £20m of assets less costs – so more or less equal to the market cap.

Slightly worried about capital adequacy – 166% of capital requirement – vs IG at 331%.

The cash flow statement is even better – Op cash flow – all free to be distributed (but probably wont be given capital adequacy) as there is no debt – £2.9m. This is just in the first half.

So why is this so cheap.  Simple – they have lost substantial market share to IG index so much so that the market questions whether they are a viable business .  IG published some slides last July – in spreadbetting in the UK their share is 44% of the market – their biggest competitor is 9%.

One could see this as game over – or opportunity for some consolidation to create a competitor with scale for IG.  I would argue the latter.

Like with any business spreadbetting follows the 80/20 rule – 20% of customers provide 80% of the profits.  Structurally, spreadbetting customers of reasonable size want multiple accounts.  One is only insured up to c£80k for a spreadbetting account.  Many punters out there would be very nervous getting even close to that number.  One is are an insured, unsecured creditor, it could take many months to get your money back.  This is particularly true for long term traders who pay large spreads such as myself.  As the spreadbetting companies are pretty homogenous anyway – charges are similar, service similar it makes sense for customers to have multiple accounts.

There is also the issue that despite what the spreadbetting companies tell you there is a conflict of interest.  In a number of instances which I am aware of (but don’t want to post about for fear of being sued) certain customers don’t feel fairly treated by their spreadbetting company (not IG or anyone in particular just in general).  As most serious punters are aware of this sort of behaviour they create multiple accounts across firms anyway.

In addition sometimes the spread betting cos dont want punters who are too good – particularly scalpers.  This leads to fallings out – again creating opportunities for competing firms.

There is also the potential for bid interest.  Last year – announcements around GAIN Capital / Cantor / City Index.   The price was over 50p at one stage – could go higher again.  It should also be remembered that there will be efficiency / regulatory capital savings for any acquirer.

Management – all new – no idea what they will do – too early to say all the old guard seems to have left.  Management have been issuing shares to themselves – for waking up in the morning I assume? To be fair they only vest in 2017.

Major Shareholders – former management – seem to be the biggest – in conjunction with usual institutional asset managers.  Between the 3 of them ex management holds 30.1% so not far from control.

In short – this is cheap, might turn into a functioning business on its own, and if it doesn’t can probably stumble along until it is bought.  There is a risk of it being a value trap slowly collapsing – but I doubt it.  I think it will slightly recover / be taken out or some combination of the two.

I have a c5% portfolio weight bought at 41 in August 13 , but am considering adding a little bit more to this.

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