Cube Midcap Report (6 Jan 2020) – The risks are priced in at #PLUS #NMC

Cube Midcap Report (6 Jan 2020) – The risks are priced in at #PLUS #NMC

Good morning!

The Midcap Report will be here every morning for the rest of this week.

This morning, there are updates from Plus500 (PLUS) and NMC Healthcare (NMC). I will take a look at each of these in turn.

And we have published a premium article by Joel, covering one of his favourite gold stocks. Well worth a read, if gold stocks are on your radar!

Ok, on with the show.

Plus500 (PLUS)

  • Share price: 827.4p (-3%)
  • Market cap: £902 million

Year end trading update

This company remains a source of fascination for many of us. If the profits are real, then the stock is cheap. But cheap doesn’t necessarily mean good – investors are concerned about the longevity of the Plus500 business model.

Usual disclosure: I own shares in IG Group (IGG). IG is the market leader in the spread betting and CFD space where Plus500 competes for business.

I’ve been very critical of Plus500 in the past, most notably calling them out in February 2019 for failing to properly disclose the extent of their exposure to client P&L.

I changed my tune in July and October. By then, the share price had fallen to levels where I saw some speculative merit to the shares:

  • “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 ultimately, I agreed with Roland:

Plus500 shares always look cheap. This hasn’t changed. Consensus forecasts for the year put the stock on a forecast P/E of 6.5 with a yield of about 10%. This may be deliverable, but for me this business remains too speculative and opportunistic to be of any interest as an investment.

Trading update

So where are we now?

PLUS says that FY December 2019 will show revenue of $354 million and EBITDA of “approximately $190 million”.

We must always bear in mind that PLUS revenue includes “market P&L”, i.e. customer net profits or losses (which become losses or profits for PLUS, respectively).

For example, I consider H1 revenue to have been understated, since it included $27 million of market losses.

This is what 2019 looks like, if we extrapolate the H2 result from today’s numbers:

The H2 revenue result is much better than H1, but if you exclude market losses in H1, the results are much more even.

So may the truth is that the H2 result is only modestly higher than “underlying” revenue (from spreads and charges) in H1. So perhaps the big improvement is mostly due to the absence of customer losses in this period?

We know from the Q3 update that market losses were very small in Q3 – just a few million dollars. So if that happened again in Q4, it would explain the full-year result. All will be revealed in due course.


EBITDA for the year of $190 million implies a H2 result of $124 million, following $65.6 million in H1.

It’s a miss against public forecasts ($196 million) but I do consider it to be an impressive gain in profitability for the second half. It brings profitability back toward the level achieved in H2 2018, which was $157 million (and note that the ESMA leverage rules did not apply until August 2018).

CEO comment:

We finished the year in good financial and operational shape following a period of change for the industry, which has provided a more certain regulatory outlook for Plus500. I am encouraged by the momentum we have shown in the second half, reflecting continued optimisation of our marketing spend, enhancements to our customer service, and improvements in our proprietary technology platform. Looking to 2020 we are confident of the prospects for the Group as we focus on further strengthening our customer offering and market positions.”

My view

The market cap is c. $1.2 billion and the enterprise value is likely to be considerably lower than that, despite the company’s buyback efforts. There are only 109 million shares outstanding, versus 114 million in December 2018. Cash at year-end might be c. $270 million, according to public forecasts.

So the EV/EBITDA multiple is possibly in the region of 5x. In exchange for that, you get a very profitable company with a declining share count, a huge dividend yield, a huge cash pile and a more stable regulatory footing.

The risks you take on are:

  • controlled outside the UK (incorporated in Israel)
  • higher customer churn than its competitors
  • likely to be at greater regulatory risk over the long-term
  • highly volatile earnings from customer P&L exposure

While I was unabashedly bearish on the stock at £20, I do think that these risks are likely to be priced in at current levels. So I continue to view the shares as having speculative merit for those of an adventurous mindset!

NMC Health (NMC)

  • Share price: £16.66p (-5%)
  • Market cap: £3.5 billion

Independent Review Oversight Committee

Last month, Muddy Waters (i.e. Carson Block) launched a short attack on this share.

I’ve been skimming through the short report this morning. It includes a wide range of accusations, which remind me of the days when we used to wonder if the Naibu (NBU) and Camkids (CAMK) numbers were real (spoiler: they weren’t).

Foreign companies listed in the UK are a great hunting ground for shorts. Plus500, for example, has been a target and is currently ranked #15 in the list of most heavily shorted UK shares (source:

NMC is a healthcare company from the Arab Emirates which made its way into the FTSE-250 (so did Plus500, by the way!)

I don’t invest in healthcare, so this isn’t my normal territory, but I always find it interesting to read allegations of fraud and financial chicanery. Among other things, the Muddy Waters report includes allegations that NMC may have overpaid for hospital assets (buying them from related parties), understated its debt and overstated its cash.

In particular, there is an allegation that NMC has concealed the the extent to which it uses reverse factoring. This is a technique whereby a company uses a loan to accelerate its payments to suppliers.

From the Muddy Waters report:

NMC has apparently given investors and ratings agencies a consistent impression that it does not engage in “reverse factoring”, or that any supply chain financing facilities are non-recourse to the company. Neither impression is correct. We found reverse factoring facilities for NMC arranged by Credit Suisse and Channel Finance S.A. Both are recourse to NMC. While these could potentially be included in short-term borrowings, we believe they are either in Accounts Payable, or not on the balance sheet at all. NMC provided no assistance with this line of analysis. NMC’s Days Payable Outstanding has risen from 54.6 as of H2 2016 to 75.0 as of H1 2019, supporting a view that these debts are APs.

I must give a hat-tip to investor and analyst Paul Hill, who sent me a note on this. He pointed out that IFRS doesn’t require reverse factoring to be included within net debt. Instead, it usually stays within accounts payables – like NMC has probably done.

Since a company with a reverse factoring facility is still on the hook to pay the amounts purchased from its suppliers (plus interest), these are certainly of a “recourse” nature.

It’s a good topic to be aware of – we may find that it pops up again, from time to time. It could be a red flag that a company is desperate for cash to pay its suppliers, or it could simply be a form of debt that would escape our knowledge, if we don’t watch out for it.

Anyway, let’s take a look at this update from NMC. Excerpt (I have added the bolding):

NMC Health plc (LSE: NMC) confirms that the Committee that will oversee the independent third-party Review announced by the Company on 23 December 2019, will be made up of the following Independent Non-Executive Directors:

Jonathan Bomford (Chair)

Tarek Alnabulsi

Lord Clanwilliam

Salma Hareb

The appointment of independent advisers to undertake the Review is currently being progressed and is expected to be confirmed shortly. The Review will focus initially on confirmation of the Group’s cash balances as at 15 December 2019 and this will be published as soon as possible. 

There is still uncertainty around the cash balances – how unnerving.

And let’s take a look at this committee

NMC has 11 directors, of whom 8 are non-executive and 5 are described as independent.

In its December report, Muddy Waters expressed doubts about the suitability of two of them: Jonathan Bomford and Lord Clanwilliam (also referred to as Lord Meade), who are both named today by NMC on its Independent Review Oversight Committee.

Firstly, it noted ties between NMC’s auditor, Ernst & Young, and the NMC Board:

Jonathan Bomford… is also a former Ernst & Young partner, and he also serves on the Finablr board.

Note that Finablr has the same founder and Chairman as NMC.


“…the Chair of NMC’s Audit Committee, Lord Meade, has no apparent accounting experience. He was Chairman of Eurasia Drilling, where he recommended a buyout by the majority oligarch shareholders while sitting on the board of another of the buyers’ portfolio companies, Soma Oil & Gas.60 Soma Oil & Gas was itself subject to a Serious Fraud Office investigation into alleged bribery and corruption in Somalia.”

My view

I will reserve judgement on all of this. As stated in my coverage of Plus500, I tend to avoid all companies from exotic geographical locations. So there is no risk that I would take a long position in NMC. The analysis by Muddy Waters is impressive, and I will keep an eye out for the complete reponse by NMC. But I see no reason to dabble in these shares, long or short.



That’s all for the Midcap Report for today.

Incidentally, I’d like to remind you that I hang out in the Cube.Investments chat room pretty much every day. It’s a friendly place, if you’d like to chat with me there!

Best wishes (and see you tomorrow),





Wordpress (4)
  • comment-avatar

    Hi Graham
    Despite being a previous holder of Plus (many years ago) I will never hold them again because I simply do not trust management.
    The numbers may look quite attractive today, but there’s always that rather significant element of doubt on how truthful the company would be when or if things do go wrong. Why risk it?

    • comment-avatar

      Hi Abtan,

      You raise a valid question and let me be clear: I do NOT have any intention of investing in this company. I am happy with my IGG holding and will leave my participation in the sector at that.

      To your question “why risk it?”, I would reply “for most people (including me), there is no need!”



  • comment-avatar

    Don’t talk to me about NMC! Sold out at bad price before Christmas after the Muddy Waters report still in a profit but annoyingly below what it had been…

    I’m still invested in IDHC which is Egyptian healthcare provider do you call that an exotic location with a UK listing also? They have dropped a wee bit lately but I had put that down to the strength of the £



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