Plus500 in retreat after quiet quarter

The rollercoaster ride for high-yielding Plus500 goes on after a big fall for shares today.

As one of last year's FTSE 250 shooting stars, Plus500 (LSE:PLUS) doubled in value over the first eight months of 2018 as the financial betting company benefited from favourable markets.

How fortunes have changed in the subsequent eight months, with shares in the contracts for difference (CFD) specialist back where they were in summer 2017 after a testing few months.

Today's disappointing trading update, which wiped another 25% from the share price, was blamed on subdued financial markets as low volatility caused a 65% slide in first quarter revenues. This compares with the frenzy around cryptocurrencies just over a year ago.

But regulatory pressures mean there's more to the company's recent share price slide than just a few months of  lacklustre market activity. Since last summer, Plus500 and its rivals CMC Markets and IG Group have been hit by new rules from European and UK regulators clamping down on CFDs for retail investors, including the use of binary options.

The regulatory intervention has increased uncertainty and heightened the focus on the company's performance in attracting and retaining its most valuable customers. 

Encouragingly, today's numbers from Plus500 suggest some resilience on this front after it added 21,306 new customers in the quarter, a rise of 10% on the previous three months.

However, the low levels of market volatility meant this was offset by a 4% fall in the number of active customers and a 64% drop in average revenue per user to US$550. This figure is well below the $1,230 average user acquisition cost recorded in the quarter. 

Clients classified as "professional" are exempt from the regulations. They accounted for 49% of European revenues in the quarter, although returns from these customers tend to fluctuate in line with market volatility. Clients outside Europe made up 54% of revenues in the quarter.

After such an uninspiring first quarter, Plus500 said it was not in a position to predict its performance for the rest of the year.

CEO Asaf Elimelech said:

"Given the level of global political and economic news, financial markets were surprisingly subdued in the period, which reduced the number of trading opportunities for customers. While revenue in the quarter was disappointing, we have much to be encouraged about."

House broker Liberum thinks that the company will take market share and that the economics of the business remain promising. However, it today cut its price target to 1,000p from 1,760p based on a downgrade of 27% to its 2019 EPS forecast and 13% for 2020.

Its revenue expectations for the rest of 2019 now average $111 million a quarter, compared with a current rate of $103 million when two out of three quarters were quiet.

Liberum added: "The rate of recent change, and analysts' inability to forecast this, have understandably raised risk perceptions." In addition, the recent disclosure of an error in the 2017 annual report has also impacted investor confidence.

The broker's new forecast for a reduced dividend per share of 60p still yields 8%, rising to 13% in 2020.