Plus 500 Ltd is a case study of an investment opportunity we highlighted for our subscribers in January 2017, which over a 7 month period the generated a 140% return.
In this case study we will cover why we found the company attractive, what happened after we covered the stock and how Reid Green & Co approaches the investment problem.
What was it about Plus 500 Ltd that made Reid Green & Co rate it a buy a 382p per share an sell at 868p per share?
Plus 500 Ltd is an Israel based online provider of Contract for Difference (CFD). The company develops and operates an online trading platform for retail customers to trade CFDs internationally over more than 2,200 different underlying global financial instruments.
In 2016 the Financial Conduct Authority announced a number of regulatory proposals that would increase the protection of retail of contracts for difference (CFD) traders, but reduce the profitability of those who provide such leveraged products. Naturally upon and after such an announcement the share prices of UK CFD providers collapsed, and in some cases sunk to multi year lows.
After investigating the financial position, valuation and prospects of a number of the afflicted companies such as IG Index and CMC Markets, it was Plus 500 that stood out as the having the right combination of business quality and low valuation. An excerpt of what we told our subscribers can be seen below:
“Plus 500 is a market leader in global CFD brokering, with an unusually concentrated positioning and strategy. It focuses only on CFD’s to the retail market and primarily using online channels, to capture a growing trend in retail CFD trading on various devices. Over the last 4 years the company has grown its revenue and net profit by 490% ($56m to $275m) and 560% ($17m to $96m) respectively, while generating 90%+ returns on equity and sending the majority of the cash back to the owners in the form of ordinary and special dividends.
The company has no debt. I think specialising on online marketing and focusing on a simple platform on all digital devices to gain deep penetration into the retail market, offering the lowest cost dealing by charging no commissions and scaling that model globally gives them a competitive distinction over their competitors. The company currently carries a price to earnings multiple of 4.4 based on its current market cap of £438million and its 2015 pre-tax earnings of approximately £100million. Due to the current regulatory uncertainty, the market is placing no value on its substantial global growth prospects.‘’
What happen after Reid Green & Co covered the stock?
On the 7th of February 2017 the company announced it 2016 results, in which they report that their revenues, net profit, earnings per share, and cash generated from operation had increased by 20% across the board in line with our initial thesis. Additionally they stated they would pay out 87% of their 2016 earnings in a final and special dividend totaling 50p per share.
|Earnings per share||$1.02||$0.84||21%|
|Average revenue per active user||$2,103||$2,019||4%|
|Cash generated from Operations||$153.3m||$128.1m||20%|
|Year end net cash||$136.5m||$156.5m||-13%|
Subsequently on the 7th of August Plus 500 announced its 2017 half year report in which they again posted record revenue, earnings and cash-flow. In line with our initial thesis their business momentum was due to geographical expansion, a 37% reduction in customer acquisition costs, a 43% growth in new customers, an 8% increase to a record level in active customers and a 10% increase in average revenue per customer.
What was the final outcome?
At the time of writing (10th August 2017) Plus 500 Ltd is trading at 868p with a market cap of £997 million, or 127% higher than when we initially covered the stock. Reid Green & Co subscribers, who bought the stock around the time of our first report, generated a return from capital gains and 50p per share in dividends received of approximately 140%.
Reid Green & Co looks for situation that have created large mis-pricings
Plus 500 Ltd is typical of type of opportunities that our subscribers get access to. Reid Green & Co looks for good companies and assets which are shrouded by situations that cause their stocks to be mis-priced. Like in the above situation, there are times where the market over-reacts to, or mis-interprets information on a company which creates opportunities for more perceptive investors. On behalf of our subscribers Reid Green & Co looks for such opportunities.