On the face of it, the annual results from Plus500 yesterday make for grim reading. Revenues at the financial betting business more than halved from $720.4 million in 2018 to $354.5 million last year. Pre-tax profit also slumped by 62.4 per cent to $189.3 million. However, while the falls look steep, they were no worse than the market had been expecting and the shares inched up ¼p, or 0.02 per cent to 911p.
It is well known that contracts-for-difference (CFD) providers like Plus500 have faced a tough time.
These contracts are derivatives that allow punters to make wagers on the direction of financial markets and use leverage to increase the size of their position. Through providers like Plus500, traders can place bets on everything from share prices to commodities and currencies, without having to own the underlying asset.
Market volatility often encourages gamblers to trade as dramatic price swings present an opportunity to make a quick buck.
Yet regulators have become increasingly concerned about these contracts and the risks they pose to retail traders. Most customers betting with the derivatives lose money and the use of leverage exacerbates the hit. The European Securities and Markets Authority clamped down on CFDs in August 2018 by introducing stricter rules, including leverage limits and forcing providers to publish standardised risk warnings.
The tougher regulations hit Plus500 and its other London-listed rivals, IG Group and CMC Markets.
Based in Israel, Plus500 was founded 12 years ago and floated on the London Stock Exchange in 2013. It listed first on the junior Aim market and then transferred to the main market in 2018. With a market capitalisation of £986.4 million, it is a member of the mid-cap FTSE 250 index. Asaf Elimelech has been its chief executive since 2016.
The results that Plus500 published covered its first full year under the stricter European rules, making it a period of transition for the company. Average revenue per user fell by 25 per cent to $1,775 while the average cost of acquiring customers rose by 12 per cent to $1,046.
Mr Elimelech, 39, said: “We finished 2019 in good financial and operational shape following a period of changes for the industry, which has provided a more certain regulatory outlook.
“We were particularly pleased with the strong improvement in financial performance in the second half of 2019 and believe that customer trading patterns have now adjusted following the regulatory changes introduced in Europe.”
Australia is poised to introduce similar restrictions. About 14 per cent of Plus500’s revenues come from there and Mr Elimelech said the company continues to “monitor and prepare for any potential product intervention measures”.
A move by Plus500 to obtain a licence from the financial regulator of the Seychelles, where there has not been a similar regulatory move on leverage, looks somewhat curious.
Mr Elimelech said the licence, which was disclosed yesterday, was not part of an initiative to shift customers from other jurisdictions, such as Australia, where rules on CFDs may become tighter.
However, he gave little detail of the plan for the licence yesterday aside from saying that Plus500 will use it to offer new products and expand into new territories.
Plus500 shares stood at 859¾p when concerns about Australia prompted Tempus to recommend selling last month, which proved to be the wrong call. However, the Australian risks remain and the Seychelles strategy is unclear so they are still a sell in the long term.
ADVICE Sell
WHY Many regulators still frown on CFDs and Plus500’s plan for its new Seychelles licence is unclear
Craneware
Growing demand for its products and the prospect of a rising dividend have failed to lead a recovery in the share price of Craneware (Greig Cameron writes).
The Scottish company sells software into the US healthcare market and helps hospitals monitor and analyse their revenue and spending. It listed on Aim in 2007 and the shares were worth more than £30 in June last year.
However, a trading update that month signalled sales had been lower than expected after it launched too many products quickly. More than 40 per cent was knocked off the shares then and a few weeks later Tempus tipped them as a buy when they were worth less than £19.
In spite of that sales hiccup Craneware’s actual results, released in the autumn, were far from awful, with revenue up 6 per cent to $71.4 million and the company having $47.6 million of cash available on its balance sheet.
Pre-tax profit was down 3 per cent to $18.3 million partly as a result of costs related to an acquisition the company decided against proceeding with. The annual dividend was lifted by 8 per cent to 26p in the 12 months to June 30. In September the shares were changing hands for more than £25 and had generally been above £23 until January.
A trading update then it warned that revenue in the first half of its new financial year would be flat as a result of the loss of one large customer. Underlying profit is forecast to be about 10 per cent higher and the board said that it was confident of meeting market expectations for the full year.
Peter McNally, from Panmure Gordon & Co, described the update as a mixed bag and expressed concern over the level of traction new products had managed to gain.
The shares fell from £23.50 to less than £19 after last month’s update and have stayed around the same level since then.
However, with more than $200 million of recurring revenue booked in for the next three years and those strong cash reserves, Craneware’s performance looks unlikely to fall off a cliff even if the shares may fluctuate in the short term.
ADVICE Hold
WHY Shares are relatively cheap but market will want more evidence of better sales
