Should I pile into Plus500 Ltd, down 15% today?

The market doesn’t much care for this morning’s update from Contracts for Difference (CFD) provider Plus500 (LSE: PLUS) and the stock is down around 16% as I write.

The Contracts for Difference industry faces escalating regulation and the company tells us of a statement from the European Securities and Markets Authority (ESMA) on 15 December regarding the regulator’s preparatory work relating to CFDs and other products offered to retail clients. ESMA plans to conclude its consultation during January and will announce official trading restrictions then.

Largely on the right side of things

No wonder investors are spooked. The industry regulator has the power to completely pull the rug from under Plus500’s business model, and if that happened the consequences for shareholders could be dramatic (in a bad way). However, the directors aren’t worried, saying the firm “welcomes this statement and the strong regulatory framework that this will bring to the industry.”

It goes on to say that on the main points highlighted in ESMA’s statement, Plus500 has “never offered binary options and has always provided balance protection to its customers across all its product offerings in all its markets.” The company reckons it has a maintenance margin level that delivers its customers additional protection and that, from January 2017, bonus schemes “for the vast majority” of operations were removed. 

Chief executive Asaf Elimelech sounds relaxed about the news saying: “It is positive to have an update from ESMA, as this provides us with more transparency as to the regulatory changes that may be implemented in January 2018.” 

From here, the firm expects to wait for the conclusion of the consultation in order to understand where it needs to implement adjustments to its business model. But Mr Elimelech sounds a note of caution, admitting that it’s difficult to assess the impact on the business until the details of changes have been finalised. Yet he reckons the backdrop is that Plus500 has a flexible business model, already provides many of the protections suggested by ESMA, and is well diversified globally, “now with seven licenses in different jurisdictions following the recent licence approval in Singapore earlier this month.” 

Opportunity in uncertainty?

Overall, I sense that the directors are pretty confident that regulatory changes will not cause too much disruption to trading, so could today’s weakness in the share price be a good opportunity to buy into the story? Even at today’s reduced share price of around 804p, the stock is up 130% or so since the beginning of 2017, reflecting the underlying growth story. Earnings look set to come in close to 46% higher this year and City analysts following the firm have a flat result pencilled in for next year. Meanwhile, the valuation looks attractive with the forward price-to-earnings ratio running a little over seven for 2018 and the forward dividend yield sitting just higher than eight.

I’d be the first to admit that dividend yields that high can signal a warning, but in this case the stock has been marked down for a clearly identifiable uncertainty and there could be opportunity in that situation. I think Plus500 is worth keeping a close eye on.