Plus500Â (LSE: PLUS) owns an online trading platform for retail punters (but not institutional or corporate traders) to bet on the movements of stock market indexes, commodities, cryptocurrencies, and so on.
When I first wrote about it, back in 2015, I explained why it had “never ‘smelled’ quite right to me.” And I’ve maintained a bearish stance ever since, on the suspicion it wasn’t fully disclosing how the business worked.
However, this year the market’s had its eyes opened to one hitherto undisclosed feature of the business model. The company’s share price has also crashed — to such an extent that the trailing dividend yield stands at 30%!
Here, I’ll give my view on recent developments and the stock’s current valuation.
Looking back
Plus500 always maintained that it generated its revenue primarily from dealing spreads and overnight charges. And that gains or losses from customers’ actual trading positions (“market P&L”) had only a marginal impact on revenue.
In its annual report for 2017, for example, it said: “In 2017, as in 2016 and 2015, the company did not generate net revenues or losses from market P&L.” However, in its latest annual results (released in February), it stated, without batting an eyelid: “Total P&L gain in 2018 of $172m (FY 2017: loss of $103m).”
“What the deuce!” cried the world and his dog. “You’ve always said you’re market P&L-neutral.” Plus500 put out a statement (in which it also disclosed a P&L loss of $19.5m in 2016), saying there had been a “drafting error” in the aforementioned 2017 annual report.
It explained: “The 2017 Accounts state that ‘In 2017, as in 2016 and 2015, the company did not generate net revenues or losses from market P&L’. The words ‘or losses’ in this statement were included erroneously.”
The explanation, and the company trumpeting that it is “historically neutral over the medium to longer term” (thanks to the market P&L gains in 2018), smacks of sophistry to me.
However, now that the high volatility of market P&L is out of the bag, is there an investment case for Plus500 at its much-reduced share price of 523p (versus a high of over 2,000p)?
Looking ahead
The market P&L volatility, which reduces what analysts call “quality of earnings” (meriting a lower rating), isn’t the only thing that’s impacted the share price. Historically, Plus500’s business has had a high level of customer churn, suggesting it doesn’t shear its retail punter sheep in a sustainable way, but skins them and eats them, requiring a constant supply of new lambs skipping in through the door.
However, last year new regulatory measures were introduced by the European Securities and Markets Authority to protect inexperienced traders from big losses. This led Plus500 to warn on profits for 2019. City analysts got out their red pens, and marked down their earnings forecasts. And they have done so again, following a Q1 trading update earlier this month. Revenue was way below expectations, and wasn’t helped by a market P&L hit of $28m.
According to Reuters, the consensus earnings forecast for 2019 is $1.22 (95p) a share. This gives a P/E of 5.5. And while you can forget the historic dividend yield of 30%, the board’s current policy implies a still very juicy 14%.
I’m almost tempted, but will continue to avoid, mindful of Warren Buffett’s caution: “There’s never just one cockroach in the kitchen.” I view the market P&L revelations as something of a cockroach.