Cube Midcap Report (2 July 2019) – PLUS, FCH, WIZZ, TRN, MRW

Cube Midcap Report (2 July 2019) – PLUS, FCH, WIZZ, TRN, MRW

Good morning! Welcome back to the Cube Midcap Report.

Today, I plan to look at:

Plus500 (PLUS)

  • Share price: 566.2p (+5%)
  • Market cap: £641 million

Half-year Trading Update

This is a share where I have been consistently sceptical, due to my belief that risk controls are somewhat lacking at this company’s business model, and that they deliberately target the least informed prospective traders.

Shareholders have had a rough ride over the past year, with a string of profit warnings taking the share price about 70% below its peak.

For my own portfolio, I’ve been adding shares in competitors IG Group (IGG) and CMC Markets (CMCX). Their share prices have also risen today in response to the statement from Plus500, which is in line with expectations.

All of the spread betting companies complained of low volatility in Q1 this year as one of the reasons for their weak performance. Sceptics could argue that this was the “new normal” after the introduction of stringent leverage controls by the EU’s ESMA regulator.

This update from PLUS suggests that Q1 might indeed have been an anomaly for spread betting companies with respect to volatility. PLUS says that Q2 revenue increased to $94 million (from $54 million).

PLUS further discloses that spreads and charges accounted for $93 million of this figure, implying to me that market P&L (i.e. the element of profit which is not controlled) may have amounted to less than $1 million. The spreads and charges are the “real” revenue as far as I’m concerned. The market P&L, by contrast, is essentially a random number!

Some more valuable detail in the update: 48% of H1 revenue came from outside the EEA, and 23% came from Professional Clients in the EEA. Using some complicated mathematics, we can deduce that 29% of revenue came from retail (non-professional) clients in the EEA, i.e. from the clients under strict ESMA rules. This is encouraging – it means that further ESMA rules on this segment will only affect this portion of PLUS’s existing revenue stream.

Finally, we get this insight:

Of note, there were signs of reduced levels of marketing across the Company’s peer group which, along with continued strong and focused marketing investment by Plus500, led to an increase in the rate of new customer recruitment and a reduction in the average cost of acquisition.

That’s certainly worth noting. Does it mean that IG, CMC and others are simply allowing Plus500 to have a greater share of new customer acquisition? Perhaps.

My view

Discussing this with a friend this morning, we came to the conclusion that IG and CMC are likely focusing even more on client retention than they did before.

It has always been the case that the other companies focused more on client retention than Plus500 did, and this might be even more exaggerated now. The ESMA regulations make new retail accounts much less valuable, and so the “mainstream” providers might be happy to relinquish some of them to Plus500.

As someone who takes an interest in this sector, would I be interested to take a punt on Plus500 at current levels? Actually, I would be more interested today than I would have been at any previous time. The reasons are:

  • The company has come clean about the extent to which market P&L affects its results.
  • We have a much better idea now about the effect of ESMA regulations on its revenues.
  • It left AIM and joined the FTSE-250 Index, giving us some confirmation from the authorities of its standing in the investment universe.
  • As mentioned already, the share price is now much cheaper than it was before!

However, I would still consider such a trade to be a “punt”, for the reasons I have discussed before. I’m not yet convinced that the company will be around for the long-term, due to its market P&L exposure and extreme levels of client churn.

Funding Circle (FCH)

  • Share price: 132.3p (-19%)
  • Market cap: £460 million

H1 Update & FY Outlook

This falls below our £500 million cut-off today after a poor update – so unless there is a recovery, it won’t qualify for future midcap coverage!

This has been a disastrous share for IPO investors at 440p, who are down 70% in less than a year:

Even though I like financial stocks, I’ve never spent time on this one because A) I don’t trust IPOs, and B) the explosion of “peer-to-peer” lending strikes me as a bubble phenomenon brought about by the desperate hunt for yield by savers (though I do think it is here to stay, in one form or another).

Anyway, now that the share price has collapsed and sentiment has been crushed, maybe I should start to take Funding Circle more seriously as a potential investment?

Today’s update for H1 2019:

  • revenue +30%
  • “segment adjusted EBITDA” at breakeven (this is EBITDA before central costs).
  • adjusted EBITDA (including central costs) produces a loss margin of 20%
  • loans under management +37% to £3.5 billion

Full-year 2019 outlook:

  • Loan performance in line with projections
  • “Increasing uncertain economic outlook has reduced demand for loans”, and FCH has “tightened lending to higher risk bank businesses”, to protect returns for its customer.
  • Therefore, 2019 revenue growth will be c. 20%, versus 40% previously forecast.

Various operational highlights are presented, which sound impressive but can’t really offset the bad news shown above.

My view: I think this could start to look interesting at some point, though I would be very reluctant to say that the stock has now reached “cheap” levels.

20% revenue growth would produce full-year revenue of £170 million, which is little more than a third of the current market cap, and it will still produce heavy losses at this size.

For a company whose fortunes are so closely tied to the economic cycle, and which remains heavily loss-making, I think that a large dose of scepticism is justified.

I plan to research it in greater detail, so that I’ll be ready if at some point it does turn good and offer attractive pricing to a prospective investor.

Wizz Air (WIZZ)

  • Share price: £34.155 (+1%)
  • Market cap: £3,500 million

June 2019 Traffic

Wizz Air Holdings Plc (“Wizz Air”), the largest low-cost airline in Central and Eastern Europe, today announces passenger and CO2 emission statistics for June 2019.

I don’t usually talk about airlines. However, it was brought to my attention that Ryanair (RYA) might be undervalued at current levels – maybe the cost advantages of certain airlines are sufficiently persistent that they could generate an above-average ROCE for a meaningful period of time? Financial software suggests that Ryanair has earned ROCE of over 10% for each of the last five years. Wizz Air has done even better.

This announcement from Wizz articulates further progress on a range of fronts:

  • Memo of understanding for 20 new Airbus aircraft from 2023
  • Existing fleet increases  by 1 to 114
  • 38 new routes, most of them involving Georgia
  • Very few cancelled flights and very low emissions.

Load factor – this is the KPI which I focus on the most, because empty seats are  Wizz achieved 95% in June 2019, up from 93.3% in June 2018. The trailing 12-month load factor is 93.2%, up from 91.5% a year ago.

Super progress. But let’s also note that Ryanair announced June traffic statistics today, too. It achieved LF last month  of 97%, versus 96% in June 2018, carrying 3x as many passengers as Wizz. Its rolling annual load factor is 96%.

Therefore, while the performance at Wizz is hard to fault, I think that I would still choose Ryanair if I was forced to invest in this sector. Fortunately, I’m not!

Trainline (TRN)

  • Share price: 424p (-0.3%)
  • Market cap: £2,038 million

Trading Statement for Q1 2020

This has been listed for just over a week, so it’s very much a newborn. Today’s Q1 update (for March, April and May) seems timed to calm the nerves of IPO investors.

In case it’s not obvious, the red circle below was added by me:

The most valuable segment in terms of ticket sales also happens to be growing at a healthy rate – good. This is “driven by app experience and eTicket adoption”.

T4B refers to Trainline for Business. Growth in this category is slow, but in line with guidance. Trainline reiterates full-year guidance from the IPO prospectus.

Checking the prospectus, I see that Trainline made an operating profit of £10.5 million in FY February 2019, after making losses in 2018 and 2017. Revenues were £209.5 million.

Even allowing for a 20% increase in group net ticket sales, I find it difficult to imagine how a valuation of >£2 billion could be considered reasonable.

Morrison Supermarkets (MRW)

  • Share price: 206.55p (+1.5%)
  • Market cap: £4,940 million

2018/2019 Financial Statements

Morrisons provides investors with some guidance in relation to IFRS16 and how this will affect its financial statements.

Off-balance sheet leases are moving onto the balance sheet. However, as Morrisons “is predominantly a freehold business”, owning 86% of its stores, the impact is relatively low.

Adjusted PBT will be £10 million lower as the new depreciation and finance costs will more than fully offset the elimination of the rent expense. There is zero impact on cash flow: it is purely an accounting change.

(If you’re rusty or unsure when it comes to accounts, you might be interested in my financial seminar coming up in September!)


Ok, that’s it for today. Thanks for dropping by – I’ll be back again tomorrow.





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