Before I start looking at Plus500 (LSE: PLUS), I have some good news….
…you can now employ my SharePad screening criteria with just a few clicks!
The process involves SharePad’s amazing Filter library.
This facility gives you complete access to numerous pre-defined filters that have been used within various SharePad articles.
Just follow these instructions to get going…
Within the main SharePad page, select the Filter drop-down menu from the blue toolbar and then click Apply filter…:
The Apply a filter menu should appear:
Now click Library, and the Filter library should appear. Select one of the filters (I have chosen my Somero Enterprises one) and then click Install:
The Apply a filter menu should reappear, but this time with the selected filter. Now click OK.:
The main SharePad page should then reappear with the results of the filter:
When you next return to the Filter library, your chosen filter will now show as being Installed:
And should you wish to remove a pre-defined filter, select the appropriate one and click Delete within the Apply a filter menu:
(Please read SharePad’s full tutorial on Creating Filters for more information)
Plus500 trading on a P/E of 6.1
I am staying with my Somero Enterprises screen for today’s company review.
As a reminder, the criteria for this filter are:
* A forecast P/E of no more than 12;
* An operating margin of 15% or more;
* Net borrowing of zero or less (i.e. a net cash position);
* A yield of 4% or more, and;
* A market cap of £150m or more.
One share that stood out within the 16 matches was Plus500:
I remembered this company had issued a positive trading statement just after Christmas:
“Accordingly, with the year ended 31 December 2018 almost complete, the Board anticipates the financial performance will be ahead of current market expectations.”
If Plus500’s recent progress has been better than expected, why then is the forecast P/E just 6.1?
Let’s take a closer look.
Plus500 review shows a full house of impressive numbers
I will start by reviewing Plus500’s Summary tab:
Pretty much a full house of impressive green numbers.
Of particular note are:
- the bumper forecast growth rates on the second row;
- the zero gearing and 106% free cash conversion on the third row,
- the incredible forecast dividend* yield on the fourth row, and;
- the first-class margin and return on equity (ROE) figures on the bottom row.
Not only has the company performed better than expected of late, the accounting fundamentals suggest the business is extremely profitable as well.
Plus500’s history shows good levels of revenue and profit growth:
In addition, margins have been astonishingly high at 45% or more:
Meanwhile, ROE is not as stratospheric as it once was:
However, the latest ROE number remains superb at above 100%. The cash has piled up, too:
And a number of special dividends* (in blue) have been paid alongside a rising ordinary payout*:
The trailing twelve-month dividend* is $2.19 per share — equivalent to approximately £1.75 — and supports a historic yield of roughly 12%.
All great stuff. And yet that forecast P/E is 6.1.
Let me now explain what Plus500 does.
50% of Plus500 clients lose $650 or less
Plus500 claims to be the UK’s second-largest provider of contract-for-differences (CFDs).
The business was established during 2008, was launched in the UK during 2010 and currently operates online in 50 other countries — notably Australia, Germany, Singapore, South Africa and Spain.
Customers can trade a wide variety of instruments — equities, indices, foreign exchange, commodities, exchange-traded funds and crypto-currencies. Active clients currently number 100,000 every quarter.
Plus500 earns approximately 90% of its revenue from dealing ‘spreads’ — the pricing difference between buying and selling a CFD instrument — with the rest coming from financing charges on certain positions held overnight.
Notable competitors include IG Group and CMC Markets. Plus500 differentiates itself by focusing on the small-time trader “without the distractions of having to attend to the different needs of higher net worth or institutional customers”.
Plus500 claims 50% of its clients lose $650 or less. Those that win (approximately 20% of accounts) make an average of about $1,000.
SharePad confirms Plus500 is an Israeli company:
The low P/E may be partly explained by the overseas HQ.
You see, a number of corporate-governance horror stories have emerged from foreign AIM shares over the years. The wider market therefore remains generally sceptical of any business listed in London but domiciled abroad.
The fact that Plus500’s annual reports do not divulge as much information as those of standard UK companies may add to the scepticism.
Nonetheless, the share price has done very well — albeit with some significant ups and downs.
Plus500 joined AIM during 2013 at 115p and the market cap is now £1.7bn:
The 70% share-price collapse of 2015 is worth investigating.
Thousands of client accounts were frozen
SharePad’s News facility quickly finds the announcement that caused the 2015 price crash:
The statement said:
“Shareholders should note that Plus500’s UK subsidiary, Plus500UK Limited (“Plus500UK”), has in recent weeks been implementing certain enhanced client on boarding and Anti-Money Laundering (AML) processes which have resulted in additional documentation checks being required on existing and new Plus500UK customer accounts.
Currently c.50% of Plus500’s revenue is derived from Plus500UK, and c.45% of Plus500UK’s customers have passed Plus500’s electronic verification process and are therefore allowed to trade.
Those customers who are impacted are not able to open new positions until they are approved by the client on boarding team, however they are still able to freely close out open positions and to service these existing positions with additional Margin.
Plus500UK has notified and is in close dialogue with the FCA in respect of these changes to its AML processes.”
The phrase “in close dialogue with the FCA” is not what you want to read.
What happened was the FCA visited Plus500 a year before that announcement to inspect the company’s client-registration practices.
All sorts of process enhancements, review meetings, action plans and remediation exercises took place behind the scenes…
…until short-sellers sniffed something was wrong…
…and forced Plus500 to own up during May 2015.
Essentially Plus500 had overlooked the proper FCA procedures for registering new customers.
Thousands of accounts were frozen, and resolving the problems took until early 2016 and cost Plus500 almost $5m.
Throw in a £205k penalty received during 2012 for earlier FCA breaches, and a €560k settlement with the Belgian authorities in 2017…
…and you might understand why investors have been reluctant to apply a rich P/E to this business.
To perhaps allay the market’s suspicion of potentially ‘shady’ behaviour, Plus500 moved from AIM to the Main Market (and the FTSE 250) during 2018.
Part IX of the associated Main Market prospectus was headed “Regulatory Overview”… and ran to 30 pages. One hopes such extensive documentation now means no more regulatory mishaps.
Plus500 affiliates can earn up to $800 a referral
Enthusiastic online marketing has underpinned Plus500’s progress.
The group describes its advertising as an:
“Analytics-driven, returns-focused customer acquisition model — based on a proprietary ‘Marketing Machine’ and affiliate programme.”
Save for roughly $20m a year spent sponsoring Atletico Madrid, marketing is performed purely online through search engines and affiliate payments:
Emphasising the money to be made within the CFD industry, affiliates of Plus500 can earn up to $800 for every referral.
Plus500’s online efforts have helped the company catch up with sector leader IG:
Impressive growth fuelled by the crypto-currency craze
With proper FCA procedures in place and the ‘marketing machine’ running again, Plus500 has recruited further customers…
…with an explosion witnessed during late 2017.
The reason? The Bitcoin boom.
However, the collapse of crypto-currencies during 2018 has meant the associated revenue surge was short lived.
My own chart below shows Plus500’s quarterly revenue and Ebitda for 2017 and 2018:
Those impressive growth rates within the earlier SharePad summary (second row) were therefore supported mostly by clients trading Bitcoin — activity for which has since reduced significantly.
Are the 2019 forecasts too optimistic?
SharePad’s Forecasts tab shows the anticipated revenue, profit and dividend* for 2019 declining between 20% and 30%:
In fact, I wonder whether those 2019 forecasts are too optimistic.
My quarterly chart above suggests the (expected) second-half revenue and Ebitda for 2018 to be $211m and $111m respectively.
Yet doubling those figures does not get close to the associated 2019 numbers cited in the SharePad Forecasts tab.
Anyway, the $2.33 earnings per share (EPS) projection for 2019 equates to almost £1.90 and a possible P/E of approximately 7.8. Not as low as the 6.1 multiple for 2018, but still single digit.
New ESMA rules may lead to greater market share
Going back to my quarterly chart, the (expected) second-half performance of 2018 appears weaker than the second-half performance of 2017.
The introduction of new industry rules probably explains the reduction. Last year the European Securities and Markets Authority (ESMA) told CFD providers to:
* Reduce the levels of effective client borrowing;
* Guarantee limits on client losses;
* Cease offering marketing incentives to attract new customers, and;
* Enhance the risk warnings within their promotions.
For what it is worth, Plus500 believes “the introduction of the [ESMA] measures will reduce the number of its competitors, enabling it to gain increased market share at lower customer acquisition costs.”
Plus500 has also allowed 8% of its customers to become ‘elective professional clients’, who can now avoid the ESMA rules. The group reckons the new regulations will eventually effect ‘only’ 30% of total revenue.
Nevertheless, the greater regulation — and the direction of travel within this area — are perhaps other reasons why Plus500 shares trade on such a low multiple.
Relatively few customers blasting through many trades
Within my CMC Markets review, I noted:
“The fact that 78% of CMC’s clients lose money leaves the firm with a high client ‘churn’. Between 25% and 30% of the customer base has to be replaced every year.”
Plus500’s churn is worse at 51%:
The higher churn is evidenced by only 16% of revenue being produced by customers that have traded with the firm for three years or more:
The equivalent proportion at CMC is 44% and the figure at IG is 52%.
This next chart surprises me. It confirms 1% of Plus500’s customers produce 45% of revenue and 9% of customers produce 91% of revenue:
I had presumed Plus500’s focus on small-time traders would have created a greater spread of client income.
CMC and IG boast a wider customer-revenue spread than Plus500 — which is odd as these rival operators now prefer to attract fewer, higher-value traders.
At the last count, 79% of CMC’s income and 80% of IG’s income were derived from 10% of their respective clients.
All told, I get the impression Plus500 relies on relatively few customers blasting through many trades before giving up after a year or so.
Something similar arguably occurs at CMC and IG, but perhaps not to the same extent.
Plus500’s bosses are on £2m a year
Plus500’s management team is unusual. The chief executive and finance director are both in their 30s and neither hold any ordinary shares:
The group’s managing director is a company co-founder and enjoys a 2.6%/£45m stake. His fellow co-founders boast an approximate 5%/£70m holding after selling half of their collective investment last year.
The chief executive’s background is interesting. Prior to joining Plus500 during 2012, he was an audit supervisor at PwC Israel.
Funnily enough, a member firm of PwC Israel audits Plus500’s accounts — and not everyone is happy with the arrangement.
Nearly 27% of shareholders voted against the auditors’ re-appointment last year:
The chief executive and finance director each took home a mighty $2m-plus during 2017:
Needless to say, the transfer from AIM to the Main Market has necessitated an upward review of the directors’ remuneration.
Documentation for this month’s extraordinary general meeting reveals three types of proposed bonus:
A “Regulatory Bonus” is a new one on me.
Sceptics wrong-footed as the shares rally more than ten-fold
True, Plus500’s numbers look great.
A forecast P/E of 6.1 gives you tip-top margins, a first-rate ROE, a history of tremendous growth and a thumping great dividend*.
That said, you do have to consider the company’s:
* Overseas domicile;
* Past regulatory breaches;
* Lack of further crypto-currency income (at least for now);
* Tougher regulation;
* High client ‘churn’, and;
* Well-paid management.
None of the above, though, has stopped the share price more than ten-bagging since the flotation.
Famous last words, but I could spot nothing wrong with Plus500’s accounts.
The balance sheet shows trivial intangibles, meaning profits have not been flattered by capitalising expenses:
Furthermore, the aggregate working-capital movement has been positive, capex has been minimal while acquisition activity has been zero:
Indeed, the aforementioned hefty dividends* underline the fact this business has been an extraordinary cash generator.
As such, the investment dilemma simply rests upon whether you feel earnings are truly sustainable for the long term.
Lower profits are anticipated for 2019, but beyond then…?
If profits for 2019 do come in as expected and can be maintained thereafter, Plus500’s single-digit P/E could be a bargain.
I guess everything depends on Plus500’s ‘marketing machine’ continuing to capture large batches of new traders:
Will the online adverts keep working? Well, they have up to now.
Until next time, I wish you happy and profitable investing with SharePad.
Maynard Paton
Disclosure: Maynard does not own shares in Plus500.
