As investments go, spread betting and other high-risk gambles are only for the brave. As for buying shares in the listed companies that offer them, that is for the braver still. A regulatory clampdown on spread betting by the European securities watchdog seems to have forced an unwelcome change on the companies that offer such services, turning them from exciting high-growth stocks into more conventional businesses, and ones on the back foot, at that. CMC Markets is a perfect case in point.
CMC Markets was founded as a foreign exchange broker in 1989 by Peter Cruddas, a former co-treasurer of the Conservative Party, who remains its chief executive. Over the years, it expanded the number of products it offered and moved into overseas markets, including Australia, Spain, Italy and France. It listed on the stock market in 2016 for 240p a share. It is a constituent of the FTSE All-share index and has a market value of more than £400 million.
Among the products it offers are spread bets, which enable investors to bet on price movements in assets from equities and currencies to commodities. It also offers contracts for difference, in which investors can take a position without having to own the underlying asset.
Rising profits seemed all but guaranteed, but then the regulators stepped in. After signalling its concerns about vulnerable amateur investors more than a year ago, the European Securities and Markets Authority imposed restrictions on contracts for difference sold to retail investors, effective from August 1, most importantly including limits on leverage.
It’s early but this week CMC Markets followed its main rival IG Group in warning that it had already noted a slowdown in its customer activity. Combined with the effect of becalmed markets, which give its clients little to trade against, CMC Markets warned that this year’s annual revenues from spread betting and contracts for difference would be 20 per cent lower than last year.
This is worse than its previously forecast range of a revenue fall of between 10 per cent and 15 per cent and the shares, already wobbly, dipped as much as 20 per cent.
Like IG, CMC Markets has been adapting to the new world by trying to increase its revenues from professional investors. It now takes 40 per cent of its British and European revenues from individual professional clients, rising to 50 per cent if institutional business is included. That means 50 per cent of its earnings still come from retail investors and means that profits are bound to be lower while CMC Markets readjusts the mix. Numis is forecasting pre-tax profits of £34 million this year, not much more than half last year’s £60.1 million.
CMC Markets has responded in other ways, including by agreeing a partnership with ANZ bank to go into the stockbroking business in Australia and New Zealand, introducing further diversity to its income stream. It will come through this, not least because it has the technological knowhow to keep the professional punters interested, though they are notoriously less “sticky” than the likes of you and me. However, it will take time.
Meanwhile, the shares are worth close to half their peak of 290½p in July 2016 and are just under 40 per cent less than their price at the listing in early 2016. Even with the prospect of lower likely earnings, the shares — off a further ¾p to 146½p yesterday — are not cheap, and the 11.9 per cent yield looks unsustainable. While there is no obvious pressure on the shares to fall further, there does not seem to be anything in sight capable of propelling them higher.
ADVICE Avoid
WHY The company will revive but it will take time and it will be less compelling afterwards
PZ Cussons
The soapmaker is finding it hard to wash its hands of problems in Nigeria. PZ Cussons, the maker of consumer products, including Imperial Leather soaps and Carex handwashes, was upbeat about trading in its UK and other overseas markets yesterday but the downturn in consumer spending in Nigeria just won’t go away. It is unlikely to do so for some while yet.
PZ Cussons was founded in Sierra Leone in 1884 by George Paterson and George Zochonis as a way to trade goods between west Africa and Britain. It now makes household products in areas ranging from personal care and beauty to food, nutrition and electrical goods, employing more than 5,000 people in Africa, Asia and Europe.
Nigeria is PZ Cussons’ largest single market and accounts for 43 per cent of its income but its revenues and profits in the country have been under pressure for years. The downturn in the oil price that began more than four years ago put strain on the country’s finances and they have yet to recover even though the price of oil has come back.
There is an election looming in February, the outcome of which could signal a turning point but, as it stands, interest rates are running at 14 per cent and inflation at 11.2 per cent. No surprise then that this has led to a downturn in consumer spending and reduced demand for PZ Cussons’ fridge freezers, washing machines and DVD players.
Fierce competition has also pushed its processed milk and yoghurt producer, Nutricima, into the red, although the company said yesterday that it had returned to break-even.
The difficulties in Nigeria forced PZ Cussons to warn on profits in March, predicting pre-tax earnings of £80 million to £85 million for the year to the end of May, warning again in June that its results would most likely come in at the bottom of that range.
The group said yesterday that its other businesses had been trading well. Nigeria will continue to be an earnings drag though, as consumer confidence takes time to recover.
Trading at 28 times earnings, the shares are not cheap but they offer an attractive yield of 4.9 per cent. They added 5½p to 235p yesterday. Nevertheless, stay away for now.
ADVICE Avoid
WHY No reason to dive in while uncertainty in Nigeria persists
