Plus500 has finally got its comeuppance from an increasingly skeptical London market. It’s Waterloo moment was, I suppose, predictable. There’s always been a legion of cynics out there, not just about the general sector (Alphaville) but also the business itself. The numbers this week have served to confirm the worst fears of the cynics. In fact, I think it’s possible that things might get much, much worse before they get better, and my sense is that more bad news is on the way, but I am nevertheless quietly buying shares in the business.
OK, so here’s what I said about the Anglo-Israeli spreadbetter a few weeks ago when discussing my 2019 watch/buy list in this blog.
“Plus500. A buyer at any point below £13 a share. Sharp Israeli outfit. Excellent digital marketers. Great vol hedge”.
Today the shares have started trading below £11 a share and thus clearly its back within my buy zone.
Now I’m not proposing to add any more colour to the events of the last week, except to say that I wasn’t terrifically surprised by developments. Talking to other players in the sector, they’d all thought that the knock-on effects of the change in regulations and the decline in crypto trading was going to have a big impact on revenues. Plus500 seemed to have escaped the carnage and was signaling as such to the market – my own sense was that it had had a lucky escape – but we now know that the cynics were right. The damage was much bigger than we expected and the management communication process has been exposed as poor in the extreme. Cue the inevitable series of articles about directors selling shares – which of course looks terrible.
Nevertheless, I would still observe that this is a well-run business, full of canny digital marketers, who are expanding like crazy internationally. My hunch is that one might be foolish to bet against the founders working on a smart recovery plan. Crucially the numbers still look impressive. By waving a finger in the air I’d guess that revenue could be running at around $500m to $550m in the next year or so, with all the usual caveats around market vol, blah blah…Given the way the business runs, that could fall through to something around $200/220m in post tax profits and a dividend payout of around $125m to $150m. The business is currently valued at around $1.6 billion which would imply a dividend yield of around 8% ish.
Crucially it’s becoming increasingly obvious to me that the whole spread betting sector is in need of consolidation. In core domestic markets the sector is going ex-growth but the big players are also trying to expand internationally – and into new verticals. It’s also obvious that some of the players in this market aren’t keeping up, while others are in a much stronger position. In sum, the sector is ripe for consolidation and if I were an investment bank or PE firm I’d be running my slide rule all over the sector.
Quite whether Plus500 would be a consolidator or be consolidated – or taken private…who knows. But that’s not in the price. And I stick by more original observation about this being a play on market vol. In the meantime, you are now being paid to wait with a generous cash dividend. I note that Odey has started buying again, but my fear is that in the short term, there’ll be a real shake out of investors who are spooked by the recent developments and we could see the price move aggressively towards £10 a share. In the meantime, though I think I might start dipping my toe in the water.