Plus500 continues impressive fightback

Hit by a grim profits warning and poor results, business has improved at this online trading company. 

Plus500 (LSE:PLUS) is continuing on the long road to recovery after a third quarter in which shares in the contracts for difference (CFD) specialist posted the second-biggest gain in the FTSE 250 index.

The 46% share price rally between July and September came during a more volatile period for financial markets, when the US-China trade war and ongoing Brexit manoeuvres encouraged customers to seek out trading opportunities.

This trend was confirmed today by an update in which Plus500 reported 18% quarter-on-quarter growth in revenues to US$100.6 million. The figure was also 10% higher than a year ago, even though the same period in 2018 included a month of business prior to new rules from European regulators clamping down on CFDs for retail investors.

Shares rallied 9% to 863p at one stage today, taking the stock back to where it was just after a big profits warning in February when the company provided a gloomier assessment on how much the new ESMA regulatory measures would impact the business.

This was subsequently exacerbated by subdued trading across financial markets between February and April, when there were fewer opportunities for customers.

While revenues have taken a short-term hit from the ESMA regulations, the company insists the new framework should be beneficial over the longer term if it means greater transparency and a level playing field across industry providers. Clients classified as "professional" are exempt from the regulations, with these investors accounting for 40% of European revenues in the quarter.

The longer-term optimism is backed by recent director share purchases after CEO Asaf Elimelech and chief financial officer Elad Even-Chen pounced in August with the price below 600p.

The stock had been trading as high as 1,600p at the start of this year, having surged to 2,000p in 2018 thanks to customers wanting to bet on the price of bitcoin and other cryptocurrencies.

Source: TradingView Past performance is not a guide to future performance

Elimelech said today that he was encouraged by the company's recent performance, particularly the 18% year-on-year rise in the number of new customers to 24,359. Average revenue per user rose 2% to $997, while the average user acquisition cost improved sharply to $921.

Guidance for pre-tax profits of around $174 million is unchanged, although the current run-rate for underlying earnings appears to be well ahead of next year's forecast of $220 million.

A share buy-back programme is also underway, with the company so far repurchasing $14.7 million of its $50 million target since August. This is part of a new policy for the company to return 60% of net profit to shareholders, with at least 50% of this being through dividends.

The stock is currently valued with a price/earnings multiple of 8.3x and dividend yield of 6.7%.

Charlton Illingworth analyst Jeremy Grime said:

"Perhaps this isn't one that investors are comfortable with for the medium term but it has proved to be a very good trading stock. The company is now buying and it looks like we may enter an upgrade cycle as the comparators get easier."