Plus500: Up 77%, Still Undervalued
Summary
- As expected, Plus500 adapted successfully to the CFD trading regulations introduced by ESMA in 2018.
- Increased market volatility in 2020 helped the company post its best annual results ever.
- Its financial and other metrics are much improved and the new CEO is embarking on a bold but sensible growth strategy.
- The stock is up 77% since I wrote about it in March 2019 but remains undervalued by ~40%.
I first wrote about Plus500 (OTCPK:PLSQF) in March 2019. The stock was hovering around 800 pence a share in London, down over 60% in six months. The reason for the freefall were the CFD trading regulations enforced by ESMA in August 2018. For more information on the exact changes the new law introduced, see my previous article. The company was already operating in compliance with most of them, but by the spring of 2019 it became evident that Plus500 was going to be negatively affected after all.
And indeed, 2019 revenue was down 51% and net income fell even more. The subdued volatility in 2019 only exacerbated the slump in the business. Some even thought the CFD trading industry will never recover. I remember reading that "ESMA killed it" in a comment section on SA somewhere.
Plus500 Survived and Prospered
But I thought the rumors of Plus500's death were greatly exaggerated. The company was debt free, had plenty of cash at hand and managed to remain decently profitable even in that nightmarish 2019. Besides, I thought that by levelling the playing field, the new regulations were going to be a net positive in the long term, bringing some stability to the space.
The main concern for Plus500 was the requirement limiting the amount of leverage non-professional clients could use. The company planned to deal with it by recategorizing those of its clients who met the requirements for an Elective Professional Client, and by redirecting its marketing dollars towards target customers who already fit that description. This, in turn, would have the side-benefit of reducing AUAC (which for some time in 2019 was actually higher than ARPU) and churn rates.
Fast-forward to Q1 2021, ARPU is handsomely above AUAC and churn is barely above 16%, down from 64.4% in 2019. That is a massive improvement in customer retention, especially considering that 2020 was a record-breaker in both New and Active Customers, as well. All of this translated into record revenue and net profit of $872.5 million and $500 million in FY 2020, respectively. Because of the company's very low capital requirements, free cash flow was even higher than net income, standing at $528 million.
Source: Plus500 website
But of course, all trading-related businesses profited immensely from the 2020 volatility surge. The company is already guiding for considerably lower revenue in 2021 and that is understandable. The thing is that, even based on a "normal year", Plus500 deserves a higher valuation.
Valuation Remains Attractive
Back in March 2019, I used what I thought was a normalized EPS figure of 150 pence a share, a 10% growth rate for years 1-10, 4% for years 11-20 and a 12% discount rate. I arrived at a fair value for the stock of 2200 pence. With the shares then at 800, I thought "a lot of things must go wrong before it turns out 800 pence was too high a price for Plus500."
A lot of things did not go wrong. As of last week's close, Plus500 trades at 1420 pence a share in London. That is a 77% price gain in a little over two years, not counting the dividends which were quite significant. Over that period, shareholders have received a total of $2.22 a share in dividends and have another $0.8292 a share coming up in July. That equals to more than $3 a share in dividends in less than three years. Not bad for a stock that still costs less than $20. The company plans to keep returning no less than 50% of profits to shareholders through dividends and buybacks.
Analysts estimate the company is going to earn $2.23 a share this year from almost $500 million in revenue. This means I barely have to change my initial valuation estimate from 2019. $2.23 equals 160 pence in EPS. Leaving the other assumptions unchanged produces a fair value of 2360 pence a share for the stock. Currently at 1420, that is a 40% margin of safety. Not to mention that as of Q1 2021, the company has a net cash position of $676 million - roughly a third of its market cap.
Source: DCF Calculator by GuruFocus
Changes for the better
Besides the much improved fundamental metrics, there are some other developments worth mentioning.
One thing I thought the company can improve was its share repurchase program. Given how undervalued the stock was, I opined increasing the amount of buybacks would be of great benefit to shareholders.
Two years later now, it feels like management read my article and agreed. The company started buying back a lot more stock. After having bought back just 1.12 million shares in 2017 and 2018 combined, Plus500 has repurchased almost 12 million shares since the start of 2019. That is over 10% of the float.
Source: Plus500 website
Another positive is that the company is now classified as a Preferred Technological Enterprise in its home country Israel, which puts it in a lower tax bracket. Plus500's corporate tax rate has been cut in half and is expected to be just 12% going forward.
Things are going well on the regulatory front, too. In October 2020, the Australian Securities & Investment Commission ("ASIC") published its regulatory changes for the CFD industry in Australia. The changes came into effect on 29 March 2021 and are similar to the ones the company successfully adapted to in the EU. I have no doubt it will be able to adapt to them in Australia, as well.
And last but not least, Plus500 has a new CEO. David Zruia has been with the company since 2010 and was in the COO role since 2013. In this respect, the company is promoting from within, which is usually the better way to do it. One can hardly find a person who knows the business better than Mr. Zruia.
The new CEO, by the way, is wasting no time turning his vision into actions. Plus500 recently announced its first acquisition. The company bought Cunningham Commodities LLC and Cunningham Trading Systems LLC for $30 million. Not only can Plus500 easily afford that price tag, but this move allows it to enter what is arguably the most lucrative market. Cunningham "brings with it a scarce and valuable license to operate in the futures and options on futures market in the US", where Plus500 cannot otherwise operate since CFD trading is banned.
I think this is a very reasonable acquisition within Plus500's circle of competence. With 2020 revenue of just $19 million, the only thing that Cunningham lacks is scale and that is exactly what Plus500's cash position and marketing expertise can bring to the table. I see this purchase as a low-risk-high-reward long-term bet in an attractive new geography. I don't know what other specific steps Mr. Zruia has in mind for turning the company into "a multi-asset fintech group over time", but so far I approve his approach. There are plenty of firms that offer a number of different trading and financial services under one roof and, provided that it doesn't make too many mistakes, I don't see why Plus500 cannot be one of them, too.
Risks
First, with regulations in Europe and Australia, Plus500's largest markets by revenue, already in place, I think the regulatory risk is somewhat reduced. Of course, it remains a possible threat in the company's other markets, but given how well it adapted to regulatory changes in Europe, I am not too worried. Any stock price decline caused by tougher regulations chatter in other countries Plus500 operates in should be viewed as a buying opportunity.
The second risk worth discussing is Customer Trading Performance, which stands for gains/losses on customers' trading positions. According to the company's 2020 Annual Report, it accounts for just 3% of Plus500's revenues since its 2013 IPO. It is, however, another unpredictable risk factor, which can spoil even the best trading update by Plus500. It reduced the company's revenue by $125 million in 2020, but its fluctuations have been and are expected to keep cancelling each other out over time. The company has proven its ability to keep that risk under control by hedging and keeping a sizeable cash cushion on its balance sheet.
Third, Plus500 relies on its technology to conduct its business. Although it managed to handle the sizeable increase in traffic in 2020 without any problems, investors must keep that risk in mind. It is, however, the very same risk factor that investors in any other website- or platform-based company have long accepted.
And fourth, Plus500 is embarking on a promising but still risky growth path. Fintechs are all the rage right now and competition is fierce. Some of those companies, think PayPal (NASDAQ:PYPL), are already huge, while many are still losing money in an attempt to apparently achieve scale first. Plus500 plans to spend $50 million on R&D over the next three years to evolve from a CFD trading firm into a multi-asset fintech company. Add any future acquisitions and things can get pricey quickly. It is a big goal and, as any new adventure, this one is not without risks.
Conclusion
Albeit bigger and with a new CEO, Plus500 is the same financially sound, profitable, shareholder-friendly and consistently growing company it was two years ago. Using normalized earnings, the stock trades at a P/E of ~9 and ~40% below its fair value.
Management seems to have adopted a low-risk-high-potential approach to its vision of turning the company into a diversified fintech player. Their announced entry into the U.S. options trading market opens a lucrative growth opportunity. Right now, however, Plus500 is priced as a no-growth laggard and is a strong buy in my book.
This article was written by
Analyst’s Disclosure: I am/we are long PLUS500 ON THE LONDON STOCK EXCHANGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (15)
simplywall.st/...Do you agree with this forecast?
Thanks
