Plus500 plc
The House always Wins. Plus500 offers online trading services
for ‘Contracts for Difference’, which are essentially bets between two parties
on the value of an underlying. It’s listed on the main board of the London
Stock Exchange.
They offer contracts on 2,800 underlying financial
instruments (including cryptocurrencies) across eight developed market regulatory
jurisdictions excluding the US. As the broker, high trading volumes and high
volatility (that attracts speculators) are good for business. It appears to
hold a strong competitive position in transparent regulatory regimes, which
bodes well for the stability of future earnings.
It’s a rare business that thrives in a pandemic, and all
indications are that Plus500 is having a better year in 2020 than 2019.
The company’s revenues declined substantially from 2018 to
2019 as a result of EU regulations crimping its operations. It lost 34% of its
active customers and 25% of average revenue per user (ARPU).
2019 was the first full year under the new EU regime marked
by two contrasting halves of low and high volatility. It could be seen as a ‘normal’
or representative year for the future – though new Australian regulations are
forthcoming this year (which aren’t expected to be very different from the EU).
It generated GBP 278m in revenues in 2019 and GBP 119m in
net profits – revealing stellar margins of 43%. Practically all costs are
variable, therefore declines in revenues won’t result in large losses. Cash
flows are excellent and there are minimal capital requirements. Shareholders
couldn’t ask for better payouts – 100% of last year’s profits were paid out as
dividends and buybacks.
The balance sheet looks like a giant cash box with cash balance
of GBP 205m dwarfing everything else.
Management have committed to a minimum of 60% in dividend
payouts - of which at least half will comprise dividends.
The company’s equity shares sell for GBP 1.2 billion or 8x
post-tax earnings net of cash.
Insider purchases have been frequent, though at prices about
20% below the current market price of 1100p. The company’s latest $30m buyback
program is underway, however, and it has been purchasing shares at market in
the last four days.
The company has enough firepower to acquire new customers
and grow its profits from 2019 levels. Though currently priced at reasonable
levels, investors may be justified taking a punt considering the competitive
advantage, tailwinds, and very generous payouts of earnings.