Investmennt Column: IG rolls on, keep buying into its growth

Chemring; Psion
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The Independent Online

Our view: Keep Buying

Share price: 372.5p (+0.2p)

Yet again, it is hard to find anything to quibble about in IG Group's full-year results, with the company just topping its own recent trading statement by reporting adjusted pre-tax profits of £78m against a predicted £77m, an increase of just over a third on last year. The shares in the group, owner of the IG Index financial-market spread betting brand, have been solid performers since we last looked at them in the beginning of September when they stood at 352p.

Our slight concerns about buying the group then – that its ability to continue to attract new customers at the rate it has been – are evaporating. The UK business is growing fast and the (much newer) international operations are growing faster.

Spread betting – or the contracts for difference that are more common outside the UK operation – is increasingly an idea whose time has come. For those who want to trade shares (or any other financial instrument) regularly, it's much cheaper and easier to do it this way than it is by buying the physical stock.

IG's growth would arguably be even more impressive if the company could more successfully get the message out that spread betting is more of an investment tool than a gambling product (although it is taxed like the latter, hence its appeal). Some 3,000 people every month are signing up for IG's training so the word is getting out, but a wider understanding of the product is still relatively elusive.

Aside from that slight criticism, the only real weakness was the small sports operation. IG might arguably do better by selling this to a specialist in the field, but it remains profitable and will get a boost from the World Cup this summer.

Given the company's prospects, a multiple of 13.4 times next year's expected earnings is not expensive and the forecast yield of 4.2 per cent is commendable. We think IG can continue to perform well for the foreseeable future, and while its sheer size means growth might be slower than in previous years, we still think there is enough potential in the company to keep investors happy. So, even though the shares have risen, we say keep buying.

Chemring

Our view: Hold

Share price: 2958p (+75p)

Like the broader defence sector, Chemring, the military goods manufacturer which last night posted a robust set of full-year results, faces some obvious headwinds. In the UK, whatever the results of the upcoming election, a defence review is on the horizon as politicians seek to claim the mantle of fiscal responsibility in the face of a yawning budget deficit. The picture is no more inspiring in the US, which spends $750bn a year on defence, and cuts are probable for similar reasons.

That said, Chemring has much going for it. Organic growth is strong, cash generation is solid and yesterday's results were accompanied by the announcement of the earnings enhancing acquisition of Allied Defence Group, a US ammunition specialist.

The company has the money to seek further bolt-on deals as the year progresses, and may even go in for a big purchase. That leaves open the prospect of a share issue to fund it. But assuming Chemring makes the right choices, acquisitions could strengthen its position further.

The valuation is supportive. The stock trades on an undemanding multiple of 11.5 times Investec's forecasts for 2010. That falls to 10.2 times for 2011. The prospective dividend yield – after yesterday's 43 per cent increase – stands at 2.1 per cent for 2010, and 2.4 per cent for 2011. Lots to like, then, so we wouldn't be sellers. However, in light of the headwinds outlined above, we don't feel confident enough to recommend a buy. Hold for now.

Psion

Our view: Buy

Share price: 96p (+1p)

The last time Psion popped up on our radar the world economy was mired in recession and leading indicators remained uninspiring. Much has changed since then, and recovery appears in sight. This bodes well for the company, which makes rugged mobile devices for blue-collar workers, helping their employers increase productivity in a range of areas.

The management team has been working hard to strengthen Psion's position in its target markets, and regular updates, including the one posted yesterday, continue to show progress. Cost cuts have make Psion a leaner and meaner beast as well.

The recovery means that we can now turn positive, as the efficiency gains coincide with improving market conditions, opening the door to higher sales and revenues. The shares are not that cheap – trading on 15.4 times Singer Capital Markets' current estimates. But this a turnaround story that looks sets to enter its most exciting phase. So buy.

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