If you bought bitcoin one year ago today, you should now be sitting on a profit of roughly 56%. You may have missed out on the chance to sell at last year’s all-time high of $19,343, but a 56% investment return in one year is still pretty impressive.
So I’d like to share with you details of a company whose share price has risen by 108% over the last year, thanks to heavy exposure to cryptocurrency trading.
CFD provider Plus500 (LSE: PLUS) is what I’d call a picks-and-shovels play. Rather than selling the end product (cryptocurrencies) it allows investors and traders to speculate on their future value. The surge in crypto trading over the last 12 months has made this a very profitable service.
Profits up 189%
This £2bn firm has recently completed its move from AIM to the London Main Market. This should reassure investors concerned about more relaxed corporate governance standards on AIM.
Plus500’s half-year results were published on Monday, when they were covered by my colleague Kevin Godbold. As usual, the figures were impressive. Among the highlights was a 189% increase in after-tax profit, which rose to $261.7m. This incredible gain was backed by operating cash flow, which rose by 222% to $272.3m.
To maintain the company’s shareholder return ratio at 60% of earnings, the interim dividend was increased from $0.2388 per share last year to $1.3786 per share.
What could go wrong?
Plus500 has generated an operating margin of 68.5% over the last 12 months. This compares to a figure of 47% for UK market leader IG Group and 32.7% for smaller CMC Markets. I think it’s fair to say that many investors don’t understand why Plus500 is so much more profitable than its rivals, or if this advantage is sustainable.
A second potential concern is that profits could collapse as crypto trading slows. The firm’s shares fell on Monday after chief executive Asaf Elimelech warned that “it was unlikely that the exceptional performance of H1 2018 will be repeated”.
Mr Elimelech also warned that August’s EU rule changes which limit leverage for retail traders could affect 30% of group revenues.
Is it too late to invest?
Doubts about the durability of Plus500’s profits have kept the stock on a modest valuation despite its rocketing earnings. This situation continues.
The company said on Monday that full-year earnings are expected to be in line with market expectations. Consensus forecasts show full-year earnings of $2.76 per share, so this puts the stock on a 2018 forecast P/E of 8.4.
Using this earnings figure as a guide, the company’s 60% payout ratio suggests a dividend yield of about 7%. However, I think it’s worth noting that first-half earnings clocked in at $2.30 per share. So these forecasts imply that second-half earnings will be just $0.46 per share.
The headwinds I mentioned earlier could end up crushing the group’s profits in H2. But this still seems quite a cautious forecast to me.
If earnings come in modestly ahead of forecasts in Q3 and Q4, I believe the shares should head north of 2,000p again. It may not be too late to buy.