Cube Midcap Report (8 June 2020) – Plus500 can’t hide its true nature

Cube Midcap Report (8 June 2020) – Plus500 can’t hide its true nature

Good morning!

Can you guess which company today’s featured image is a reference to?

Today I’m looking at:

  • Plus500
  • Frontier Developments
  • easyJet
  • S4 Capital

On Saturday, I published an update on one of my holdings. It’s a premium article outlining how I analyse the only stock I’ve bought this year – may be of interest!

Finished at 3pm.


  • Stock data should display here.
Market cap £1.2 billion
RNS Trading Update
Writer disclosure No position in PLUS. Long IGG.

Well done if you guessed correctly. Plus500 is the company I occasionally refer to as a “bucket shop”. I prefer the Wikipedia definition to the Investopedia definition.


As defined by the U.S. Supreme Court, a bucket shop is “an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in”.

I do not refer to IG Group (in which I have a long position) or CMC as bucket shops, since they hedge most or nearly all of their customers’ bets. So when you place a bet on those platforms, there is a trade on the underlying instrument.

Let’s see what Plus500 has to say:

  • continued record levels of customer trading activity since the last update.
  • 100,574 new customers so far in Q2, ahead of the expectations for the entire quarter and ahead of the entire Q1 result (82,951).

The next bit is where it gets juicy:

Revenue from Customer Income 1 remains at record levels, with the Company generating approximately $249.0m in Q2 to date. However, in recent weeks, most particularly, the week ended 5 June, the Company’s Customer Trading Performance 2 for the year now represents a gain for customers and consequently total revenue for Q2 to date stands at approximately $102.5m.

This is exactly the reason I’ve been arguing (and Roland too) that Plus500 is riskier than its rivals. Without proper (or perhaps any) hedging taking place, you can get these wild swings in customer P&L. When customers win, Plus500 loses. When customers lose, Plus500 wins.

Plus500 argues that Customer P&L (“Customer Trading Performance”) will be approximately flat over time, and it might be right about that – but the wild swings do, in my opinion, add a significant risk factor for the company.

The week ending the 5th June was a week in which the S&P500 and other stock indexes went up in almost a straight line. Plus500 customers were positioned bullishly, we can assume. I wonder how much of the almost $150 million P&L loss suffered so far this quarter, took place in that week?

The risk is that, some day, Plus500 customers go on a major sustained winning streak and wipe out the company’s cash balance. That might not be very likely, but I am unable to quantify this risk, and that’s why Plus500 makes me nervous.

I note that the company does have a cash balance of $474 million. Presumably most of this is excess capital. The company is right to point out that this provides a cushion against customer P&L losses.

The outlook is optimistic that the negative customer P&L impact won’t be sustained, and the full-year expectations will be achieved:

…notwithstanding the uncertainty regarding the duration of current levels of volatility or the unquantified potential impact from regulatory changes in Australia and the relatively early stage in our financial year, revenue and profitability for the full year is currently expected to be in-line with consensus expectations, as revised following the Trading Update on 28 April 2020.

CEO comment:

“We have consistently stated that Customer Trading Performance 2 is subject to significant market movements and is therefore likely to fluctuate. This is magnified during periods of heightened market volatility such as those we are currently experiencing and given the growing scale of the business. Nonetheless we continue to expect this performance to revert to a medium-term historic level of near zero and our outlook for the year remains unchanged.   

When he says “consistently”, he must be referring to the last 15 months only.

It was last year when the company came clean about the impact of customer P&L. Prior to that, the company had pretended its results from 2015-2017 were free of major customer P&L impact, due entirely to its excellent risk management systems. That was, in hindsight, a load of rubbish.

My view

Lest there be any misunderstanding, I should make clear that I am not an outright bear on Plus500’s prospects. As of last July, I thought that the risks might be priced in and that it could make for an interesting “punt” for adventurous investors.

Consensus forecasts currently look for revenue (after customer P&L) of $374 million this year, and net income of $283 million.

These numbers have been totally blown out by the amazing conditions in H1. You can see in today’s update that revenue in the last two-and-a-bit months alone is $102.5 million. Revenue in Q1 was $317 million.

So in my view, there is definitely some “value” to be had here. You just have to watch out for two or three big issues, in my view:

  • Volatility and trading activity will return to normal, at some point.
  • Plus500 has a much riskier business model than its peers, in my view. At the end of the day, it’s still a b****t s**p.
  • Some people might still be concerned about being able to understand the corporate governance and culture of a company not headquartered in the UK (Plus500 is effectively an Israeli company). It’s now in the FTSE-250 index, which gives it a little extra credibility, but not much – remember that NMC Health and Finablr were in the FTSE-250 index as recently as this year.


Frontier Developments

  • Stock data should display here.
Market cap £770 million
RNS Trading Update
Writer disclosure No position.

Feel like just the other day I was commenting on this one.

Indeed it was on May 20th when FDEV updated the market and said that the FY May 2020 result would be “materially ahead” of its previous guidance.

This is confirmed today. The FY May 2020 result is:

  • revenue £76 million (previous expected range £65 – £73 million)
  • operating profit “at least £16 million” (previous expected range £11 – £13 million).

FY May 2021 starts “confidently”:

…based on our attractive portfolio of existing titles, our exciting development and publishing roadmaps, and our skilled, passionate and growing team of people who are doing a terrific job during these challenging times, continuing to work from home.

A major upcoming release is the space simulation “Elite Dangerous: Odyssey” – an update for an existing franchise.

The trailer for this has an impressive 600,000 views on YouTube. It will be out in early 2021.

Lots more in the pipeline, too:

FY21 will also see the release of genre leading Planet Coaster on the PlayStation and Xbox consoles, and the first two game releases from Frontier’s third party publishing initiative. A further three third party games have already been signed for FY22 and there is scope for more.  Five or six third party game releases per year are expected from FY23 onwards.

My view

As stated in my previous coverage of this share, I have no right to comment on it because I have been continuously surprised by its strong performance and its high valuation.

Its diversification is improving and impressing me – it no longer seems to be overly reliant on one or two titles, and instead has a handful of good franchises.

Forecasting operating profit in the current financial year (FY May 2021) is currently £17 million, rising to £26 million in FY May 2022.

My instinctive need for value is still too strong, so I can’t stomach FDEV’s market cap. But I’ve been saying this since the share price was around £10, so it’s probably a bad idea to listen to me!



  • Stock data should display here.
Market cap £3.7 billion
RNS Directorate Change
Writer disclosure No position.

It has been a while since I mentioned this one, where Sir Stelios tried to decimate the Board after they refused to cancel aircraft orders.

Stelios was defeated by other shareholders last month.

The Chairman wrote after the vote:

We are relentlessly focused on cash conservation and ensuring that easyJet emerges from the Covid-19 crisis in a strong competitive position. The Board seeks good relationships with all of the Company’s shareholders and hopes to be able to re-engage constructively with Sir Stelios.”

CFO Andrew Findlay, one of the directors who Stelios tried to remove, gave 12 months’ notice a few days later.

The company then announced an updated plan to reduce both its fleet size and workforce, which Roland covered.

Today, we learn that two other directors are stepping down – Deputy Chairman and Chair of the Finance Committee.

These were not included in the list of directors which Stelios initially tried to remove (though I guess he would have removed them later, if he could).

My view – easyJet has provided some consolation to those who are wary of unnecessary aircraft orders – the fleet at the end of FY Sep 2021 is forecast to be 302, which is 51 below the pre-Covid plan.

With passengers to the UK being quarantined in the short-term, demand expected to remain subdued until 2023, and the likelihood of below-cost competition from flag carriers, I can unfortunately see few attractions in this sector.

Those who have the patience to wait until 2022/2023 might be rewarded, but personally I would require a discount to net asset value before I considered getting involved. Perhaps I am too bearish when it comes to airline stocks, mimicking Uncle Warren.


S4 Capital

  • Stock data should display here.
Market cap £1,280 million
RNS AGM Statement
Writer disclosure No position.

Sir Martin Sorrell’s new vehicle makes a statement on macro/political factors, then gives an overview of S4’s strategy and acquisitions.

He notes that S4 would be in the FTSE-250 Index, if it had a premium listing. I wonder why not go for that?

He says S4 has achieved “unicorn” status, based on its market cap. That sounds very wrong to me – unicorn refers to privately-held startups, not listed buy-and-builds. Am I wrong?

Key points in the trading update:

  • trading is “strong, but understandably below a pre-pandemic budget”
  • revenues up 68%, like-for-like revenues up 11%
  • gross profit up 82%, like-for-like gross profit up 15%
  • “early indications are that May will be stronger than April across both our practices”

Client concentration – the two biggest clients are over 5% of revenue. Sorrell talks about this positively, calling the clients “whoppers”.

Offices – South Korea and Spain now open, Germany is up next.

Balance sheet – there is an average net cash position. Planned mergers will conclude “without compromising the strength of its balance sheet or liquidity, at least until the threat of Covid-19 recedes”.

My view

This appears to be trading at a very significant premium to book value. Book value was £464 million at December 2019, prior to some share issuance.

The market clearly thinks that Martin Sorrell can add lots of value to an M&A strategy in the sector that he knows so well.



Wrapping it up there for today.

A huge Thank You to those with Gold Membership, for supporting these reports.

Best wishes





Wordpress (10)
  • comment-avatar

    Wild guess – Plus500 – the infamous bucket shop.
    Very happy holding IGG since they understand they are a broker, not a prop house. Should have just waited a few days before adding – IGG (if special dividend) is looks very attractive.

  • comment-avatar

    Must be easyjet. Given the proposed ridiculous quarantine restrictions we’ll all be having to take our holidays in this country this year (and that looks very much like a UK beach to me).

    Of course, the government could suddenly have a “light bulb” moment and realise how stupid the idea is and change their minds. Why not, they’ve changed directions often enough over the past few weeks.

    • comment-avatar

      Sorry, it was a reference to bucket shop!

      • comment-avatar

        I kind of guessed that Graham. It was just a way to enable me to vent some of my fury as to what is going on. My son owns a small bar/cafe so I’m probably biased. It’s a very small property so not typical but he says that with 2M social distancing he can’t re-open. That means eventually 6 staff currently being furloughed becoming unemployed.

        Hopefully the government will realise before it’s too late just what deferred unemployment is waiting in the wings.

      • comment-avatar

        Best wishes to your son, Laughton. I personally hope that I never hear the phrase social distancing again after this year.

  • comment-avatar

    OK – maybe “fury” was too strong a word. “frustration” probably better.

  • comment-avatar

    I came for the word ‘bucket’ and I was not disappointed. The photograph of a bucket was a plus, erm, bonus, thank you. They don’t hedge and the market has roared back, most punters are long hence the inevitable big customer wins number released today. Ow. Still holding.

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