Description

This is a follow on from our Plus500 write-up 2 years ago. Although the shares have since doubled and including dividends provided a total return of nearly 150%, we believe the shares will double again over the next 2 years.

Progress since our prior write-up in August 2019

At the time we were just coming out of the implementation of CFD regulation across the EU. We noted an underlying quarterly revenue run-rate of c.$100m with an EBIT margin of just over 50%. Upcoming Australian CFD regulation was still an overhang.

Since then, the underlying quarterly revenue run-rate (ex-market P&L) has more than doubled, averaging >$200m over the past 6 quarters, as the active customer base doubled and ARPU remained stable (ex-market P&L). Operating profit soared to >$500m in 2020.

Australian CFD regulation was finally implemented towards the of Q1 of this year.

Shares have been weak so far this year (roughly flat vs relevant benchmarks +~20%) on concerns of a revenue/profit cliff post last year’s record activity levels which were in part driven by WFH. This was exacerbated by UK listed peer CMC which dropped close to 30% after guiding for slowing trading activity on high comps.

Why the opportunity is exciting at this point and risk-reward highly asymmetric

Fears that there will be a revenue/earnings cliff has brought to a pause the multi-year rerating process of Plus500 which still trades at a wide discount to listed peers. We believe that due to this focus on near term revenue trends as the world reopens,  the market is overlooking several key factors that will drive strong performance of Plus500 shares over the next 24 months:

·         Unlike for CMC, consensus estimates for Plus500 did fully incorporate the slowdown in trading activity post pandemic. This is evidenced by the fact that 1H results (reported 2 weeks ago) significantly exceeded estimates, the company guided for full year revenue to “be significantly ahead of current compiled analysts’ consensus forecasts” and estimates were revised upwards by double-digits %. We believe current updated consensus for 2021 is still somewhat too low

·         Plus500 is taking advantage of the massive increase in profitability by investing to further expand its technology leadership.  This year the company announced a $50m investment in a new Tel-Aviv based R&D centre

·         During the past 2 years the company has added a couple of new regulatory licenses to operate in new jurisdictions including Singapore which increases the sustainable base of active customers relative to pre-Covid levels

·         Several high profile board appointments (e.g. the appointment as Jacob Frenkel as Chairman in H1 this year) and increased focus on ESG metrics to further drive credibility which should help the re-rating process of the shares

·         The company has just launched ‘Plus500 Invest’ (so far in 7 countries and expanding rapidly)  which is its first foray into share dealing. Trading commissions will be among the lowest in the market (there’s no zero commission dealing in Europe) and it will be used as an additional customer acquisition funnel for Plus500 CFD business. The cross-sell could be quite powerful, particularly in large markets such as France were advertising CFD offerings is prohibited but share dealing advertising is permitted. Plus500 will now be able to market its platform in such countries

·         Last but not least, in July Plus500 has acquired US based Cunnigham which provides the company with the necessary licensing to operate in the US options and futures market. Retail futures trading is an underserved/underpenetrated market which Plus500 currently estimates to be worth $2bn and growing rapidly. Considering the company’s strong in-house costumer acquisition capabilities and its experience and success in building the leading B2C retail CFD trading platform in Europe, we believe the company’s chances of replicating its European success in the US are high. The plan is to launch the platform next year with traction showing in 2023.

We estimate that the existing business alone can generate >$3 EPS on sustainable basis and is still growing. Therefore, ignoring Plus500 invest and the US, the shares are currently trading on ~6x P/E and that’s before adjusting for the c.$700m net cash balance (roughly half of which is excess/distributable according to management). At the stated minimum 50% dividend payout ratio that’s also an 8% dividend yield while we wait for anything else to happen. And they are buying back shares on top of that. IG group, a business with inferior prospects (recently written-up on VIC), is trading on double Plus500’s multiple.

By 2023, we expect the company’s ex-USA earnings power to approach $4/share. The US will add a significant growth lever to that and could over time easily double the total size of the business. But putting that aside, as the multiple rerating process restarts, we see an exit P/E of 10x in 2023 for 100% upside from current levels. If investors start factoring in the US prospects the upside could be significantly larger.

Conversely, should plus500 Invest and the US fail to deliver material upside and trading activity stagnate, you are paying 6x P/E and receiving double-digit total shareholder returns (via dividends and buybacks). With all the regulatory changes now fully implemented, downside should be capped even in this scenario.

Catalyst

• Results exceed expectations
• Traction with Plus500 Invest
• Successful launch of Plus500 US Futures trading