PLUS500 (LON:PLUS): An Investment Primed For Take-Off?

Having acquired the CFD provider Plus500 roughly two weeks ago, it has to be said this was one of the better trades I have done, admittedly more through luck than judgement. The company were originally on my shortlist when I purchased IG Group, but I also decided to jump in and purchase Plus500 as a hedge against bad news for these firms with the European Securities and Markets Authority (ESMA) ruling on some aspects of the products, particularly leverage. 

The news came out and judging by the initial response, it became clear that IG didn’t like it, whereas Plus500 were more upbeat. The share price moves have been telling. IG have stood still, but Plus have rocketed almost 30% inside of a couple of weeks:

This picture doesn’t show the previous rally either. Around a year ago, Plus500 were trading at below 400p so anyone who has been in since then has trebled their money. 

Hindsight is a wonderful thing of course, and it wasn’t until the last months of 2017 when the share price started brewing and making its upward moves. And it was well-deserved as well, as the last year proved to be an excellent one for the company. All metrics were up, and there was a bonus to be had in that its cryptocurrency products were fabulously profitable.

I have been in since 1060p and give the huge rises (the price hit 1340p today) it is time to take stock of where the share is. Admittedly, whilst I believe that the share was undervalued at the time, I didn’t think we’d be at this stage so quickly. 

Future prospects

I am a user of both IG Group and Plus500. I use their websites, plus I have their respective phone apps. In my opinion, these aim at slightly different markets. I would reckon that IG would attract the more professional investor, the ones with larger portfolios, and their range of product reflect this. It is no surprise that IG felt the pain from the ESMA much more than others. There is not too much wrong with leverage, provided it is in the right hands.

Plus500 have the feel of something a bit younger. Their offering is a bit simpler: a pure CFD provider. You cannot purchase equities, but you can make bets on virtually everything else. The stake sizes are much more friendly. For example, on commonly traded shares, IG’s minimum stake size is £1, which gives you a £1 movement every time the share price moves a penny; the equivalent of buying 100 shares. The stake is greatly reduced on Plus500 – you can have a stake equivalent to just 20 shares. This also has a much lower margin requirement.

My instinctive feel is that the Plus500 platform will be seen as more of a casino than an investment and their moves to make it accessible to as many people as possible means that they are in a better place to acquire volume, especially among unsophisticated users who don’t have the thousands of pounds required to purchase the equities but still want exposure to them.

In the long run, I feel that IG Group possesses overall better quality and can keep earning from its customers; by contrast the churn rate at Plus500 must be high (I read somewhere that most of the small-time investors end up losing most or all of it). This isn’t to say either approach is wrong, and certainly with the world offering less solid opportunities, there will always be a supply of new customers. 

So what is a Plus500 share worth?

This is quite subjective. They have clearly beaten all the estimates recently and on current figures, the shares still look cheap. The last dividend was £1.05 and this was comfortably covered by earnings. Because of the recent performances, cash has also being increasing steadily, with reserves of £242m. This is certainly the type of company we like owning, and it appears that even the gurus on Stockopedia agree: Plus500 appears on no less than 12 screens, more than any other type of share.

Estimated earnings for 2018 are $243m and this gives a forward P/E of 8 times. That is much below the average of 11 for firms in the financial sector, although it should be noted that there is a fair amount of variation in these firms businesses.

A comparison between some of its peers show that there may be further growth to go:

The margin is huge for Plus500 – as you can see compared to CMC and IG. The profits it is generating from operations is far above the competition, albeit on a narrower range of products.

The valuation attached seems on the low side. Even on a historic P/E, the shares are trading at 10 times earnings, which is much less than IG Groups 15.5, but comparable to CMC’s 9.8.

One of the big questions that has to be answered is how reliable earnings estimates will be, as I am sure that expected growth is part of the share price explosion we have seen in the past two weeks. For me, I am not too sure I can share the optimism. I can see their primary market of CFD trading is well protected, and difficult (but not impossible) for a competitor to attack, especially given the margins available. Additionally, it seems very difficult to predict what might happen in the crpytocurrency markets. A non-volatile market would be poor for trading, but lower or higher prices may either lock people out or make purchasing outright more attractive.

Further future action with regard to leverage may well make trading harder. Even for cryptocurrencies, the current ratio of leverage is 1:20, and given how quickly these markets can move, people may still get into serious trouble.

That said, I still believe there is some upside in the price. I believe the proposition is much better than CMC (a smaller competitor) and although I feel IG provide a better quality of earnings, the P/E discount should not be so high. 

It remains to be seen if this latest rally will continue the trend or come crashing down. Previous price action shows the last few corrections from new highs have been fairly large, with the share losing c.10% before powering back up again. With most of my gains this year unrealised, I will set a stop at 1,260p to book some profit, and pray it’ll still be intact at month end. 

Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.

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