Cube Midcap Report (29 Oct 2019) – Cash surplus at Plus500 #PLUS #HTG #AHT

Cube Midcap Report (29 Oct 2019) – Cash surplus at Plus500 #PLUS #HTG #AHT

Good morning!

Tuesday’s Midcap Report will cover:

Plus500 (PLUS)

  • Share price: 836.6p (+6%)
  • Market cap: £952 million ($1,220 million)

Q3 trading update

Plus500, the international CFD provider, has made frequent appearances on this website – see the archives.

In February, I wrote a popular article detailing the scandalous revelations about the extent to which Plus500 profited from client losses, and was exposed to losses from client gains. Prior obfuscation had made this point entirely unclear to the investor community.

In a July edition of the Midcap report, with the share price having fallen by nearly 40% since my February article, to 566p, I speculated that Plus500 might be in territory where a punt on it could make sense:

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!

But as a risk-averse individual, I was happy to stay on the sidelines and participate in the spreadbet/CFD sector only via IG Group (IGG) and CMC Markets (CMCX) (please note that I still have a long position in IG Group (IGG)).

Roland, whose views appear broadly similar to my own, also covered Plus500 at its H1 results in August.

With the history out of the way, let’s move on to today’s RNS.

Q3 update

Key points from this update are as follows:

  • Trading is in line with expectations.

According to the forecasts visible to me, these expectations are for net income of $138.4 million (versus the latest market cap equivalent to $1,220 million, i.e. P/E multiple 8.8x).

  • Q3 revenue of $110.6 million, versus $94 million in Q2 and and $54 million in Q1.

The revenue numbers above are stated after customer P&L. The corresponding numbers excluding customer P&L are:

  • Q3 revenue of $114 million, versus $93 million in Q2 and $82 million in Q1.

The big discrepancy was in Q1, when PLUS suffered from $28 million of negative customer P&L (i.e. client wins).

I prefer to use the second string of figures, since they represent Plus500’s revenues from spreads and overnight charges. These are effectively the service charges paid by customers. The customer P&L is then a large random number which might be positive or negative (most recently, it has been negative for PLUS and positive for its customers).

The “underlying” revenue is therefore running at almost $100 million per quarter, year-to-date.

In a sign which might be positive for rivals such as IG Group and CMC Markets, Plus500 notes in relation to Q3 that “The period benefitted from geopolitical events in the quarter, with this heightened activity reflected in trading patterns“.

IG has already published a positive update for the quarter ending in August, in which it described “favourable market conditions”.

  • Average user acquisition cost (AUAU) falls again to $921, versus $1,079 during H1.

Possibly as a consequence of the ESMA regulations, competition is now weaker for ad space in this sector. This is reducing Plus500’s costs and could be an example of a sort of “last man standing” effect.

Having said that, I’ve just tested the “trade CFDs” search on my own computer, and Google didn’t serve me up with a Plus500 ad. The companies most interested in me are IG, ETX, CMC and eToro:

I’m not sure why Plus500 doesn’t want to advertise to me, but it does still appear to be the case that advertising is cheaper for CFD companies. New customers were up 18% compared to Q3 last year.

  • Average revenue per user (ARPU) up 15% sequentially.

Excellent news. Roland rightfully pointed out in August that ARPU had dipped below AUAC. This has now reversed in Q3 (though we should bear in mind that the current level of excitement around “macro and geopolitical events” isn’t permanent).

  • 45% of Q3 revenues from outside EEA region.

This is lower than H1, when 48% of revenues are non-EEA, though it is marginally higher than Q2.

Non-EEA revenues don’t have to deal with the very strict ESMA regulations, but of course there is a perpetual risk that ESMA-type regulations could become standard around the world.

  • 40% of EEA revenues from elective professional clients (EPCs)

Using complicated maths, I calculate that this means 22% of total revenue was from EPCs. EPCs also don’t have to deal with the full extent of the ESMA regulations.

In H1, 23% of revenues from EEA professional clients. So the Q3 performance from an EPC perspective is marginally “worse” than H1.

  • Cash balances / Share buyback

Cash is now just a few million shy of $300 million, with the company planning to purchase up to another $35 million of shares in its buyback programme. It made a $70 million dividend payment in July.

  • New Regulations in Australia

Company comment:

Plus500 responded constructively to the Consultation Paper and continues to assess the potential impact on the c.15% of Group revenues contributed by Australian clients in the nine months ended 30 September 2019. The Board believes that the introduction of the measures will, over time, reduce the number of its competitors, enabling it to gain increased market share at lower customer acquisition cost.  Inevitably, the transition period after any new regulations is challenging, but as seen in Europe, client trading patterns subsequently have adjusted and stabilised and the Board therefore expects to see a similar pattern evolve in Australia.

  • Outlook/CEO comment

Like all operators in the sector, Plus500’s performance for the remainder of the year is dependent, among other things, on financial market conditions providing sufficient trading opportunities for customers. However, we are encouraged by the continued improvement reported in Q3 and we remain on track to meet expectations for the year as a whole.

My view

I continue to think that this could make for an interesting “punt”, and am tempted to go long of this company for the first time.

To do so, I would need to relax my qualitative filter when it comes to avoiding companies whose primary location is outside the UK/Ireland/USA. I very rarely break this rule, because it tends to work out badly when I do!

My other personal obstacle is that I’m already heavily invested in this sector, via IG.

And I fear the volatility that comes with Plus500’s wild customer P&L swings.

Tempting, but I’m still on the sidelines for now.


Hunting (HTG)

  • Share price: 407.5p (-3%)
  • Market cap: £680 million

Q3 2019 Trading Update

This isn’t one I normally cover, but let’s take a quick look.

Company descriptionWe manufacture premium, high end downhole metal tools and components required to extract hydrocarbons across the well construction, completion and intervention stages of the well’s lifecycle.

It is profitable and available at a low double-digit P/E multiple, having been unprofitable from 2015-2017.

The key paragraph in this update is at the top:

As anticipated, challenging markets continue to be a feature of our industry, negatively impacting trading conditions and results in September. In particular, a slow down within US onshore completions has continued which has been partially countered by ongoing improvements within our offshore and international operations, resulting in a net overall decline for the Group profit in the quarter compared to Q1 and Q2 2019. As a result, the Board anticipates a full year EBITDA result at the lower end of market expectations, given current trading momentum and the overall product mix of results forecast for the balance of the year.

Hunting’s financial quality metrics are unimpressive (e.g. ROCE ~6%) and the exposure to cyclical commodity prices is something that I generally avoid. So I will leave this one for others to study in greater detail.


Ashtead (AHT)

  • Share price: £23.455 (+1%)
  • Market cap: £10.7 billion

Notes offering

The equipment rental company Ashtead is one of the rare UK large-caps which has compounded wealth in a serious way for investors. It has been an (approximate) 30-bagger over the past 10 years, as profits have skyrocketed.

For those who want to take part in Ashtead’s success in a safer way than the equity, there are new offerings of “second priority senior secured notes”, due in 2028 and 2029. The size is $600 million at each tenor, and their yields are 4% and 4.25%, respectively.

The proceeds will be used to pay off 2024 Notes and a portion of another credit facility used by the company. It’s a rearranging of the deck chairs on the good ship Ashtead.

CEO comment:

“We are delighted with the support our new offering has commanded from investors.  Good credit markets have enabled us to fix the cost of a further tranche of our debt at attractive long-term rates and extend our average debt maturity beyond 6 years. This enhances the flexibility of our debt package and further strengthens our balance sheet.”

My view

It’s not difficult for me to understand how this could be attractive to those seeking US dollar income, but investment-grade bond yields, even in the US, are still too low to be of any interest to me.

Ashtead’s credit ratings are as follows. It’s one notch above junk according to every rating agency:

All done for today. Back with more Midcap analysis tomorrow!




Wordpress (2)
  • comment-avatar

    Didn’t think you would be interested in a bucket shop! (Your words not mine :D)

    Understand reticence to overseas – I share this and Africa/Israel don’t end well (for me at least!)

    Australia is interesting, more for readacross to CMCX – I seem to have a vague recollection that they have a sizeable presence in Australia.
    Haven’t looked at this space recently, but CMCX was typically the one I found most appealing on valuation grounds.

    • comment-avatar

      Thanks for feedback Vivek.

      Yes, it is a bucket shop but at least this is out in the open now!

      CMCX tends to be cheaper than IGG, since IGG is the market leader with (in my opinion) the most valuable client base 🙂

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