IG Group shares tumble after weaker third quarter

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IG Group shares tumble

Highlights

IG Group shares fell 21.42% after an initial 27% drop.
Quarterly revenue is expected to decline 14%.
Full-year revenue growth guidance has been reduced.

The shares fell as much as 27%, their steepest intraday decline since December 2016, before recovering part of the loss. IG Group was trading at 1,005 pence, down 274 pence, or 21.42%, according to the latest market data. The selloff followed an unexpected decline in third-quarter revenue and a weaker full-year outlook, Bloomberg reported.

Revenue falls below earlier expectations

IG Group expects third-quarter revenue of about £240 million, a decline of 14% from the same period last year. The company now expects total revenue for the financial year to increase at a mid-single-digit percentage rate.

That is a substantial change from May, when IG projected organic total revenue growth of between 10% and 15%. In July, the company was still expecting its full-year results to meet market expectations.

The weaker quarter was concentrated in IG's over-the-counter derivatives operation. Net trading revenue from the business dropped 18% year over year to £155 million, even as customer income increased 8%.

The difference between those figures means IG retained a smaller share of the income generated by customers than it did a year earlier, putting pressure on revenue despite stronger underlying customer activity.

Core trading business comes under pressure

IG provides retail customers with derivatives, stock, and cryptocurrency trading. Its latest results show that higher customer income does not necessarily translate directly into higher trading revenue, particularly in its over-the-counter business.

The setback comes as IG expands into another area of retail trading. In July, it agreed to acquire U.S. sports prediction-market operator Underdog for as much as $1.3 billion. The transaction gives IG exposure to a growing U.S. market while its established derivatives operation faces weaker revenue conversion.

IG is due to provide a strategy update on Oct. 22, when the company is expected to give investors more detail on its plans following the latest quarter.

Lower guidance changes the focus for investors

The revenue warning changes the picture IG presented earlier this year. The immediate issue is no longer whether the company can deliver the faster growth previously expected but whether weakness in its core trading operation persists into coming quarters.

The strategy update will also put greater attention on how IG balances investment in newer businesses with the performance of its existing derivatives franchise. The recovery in the shares from their intraday low suggests the initial selloff moderated, but the stock remains substantially below its previous close.

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