PLUS.LN - Plus500

[Picasso]

Probably one of the more interesting stocks I have come across lately.  Saw it was on VIC and looked into it a bit more.

 

This is a London based broker for forex, commodities and CFD contracts.  If I remember correctly, the commodity regulator in the United States put a restriction on forex leverage from 1:200 down to 1:50.  This was pretty terrible for the earnings of a lot of US based forex companies. 

 

This company in particular seems really good at managing the expenses and has a lot of good reviews and feedback from what I have been able to dig up online.  There are some unhappy customers but that comes with the Forex/CFD market since it is a bit like a casino and the majority will burn out.  The reviews for the apps on iPhone/Android are solid too.

 

As for the numbers (I am going to adjust these figures into USD).

 

6 months ending June 30th 2014: $63 million of free cash flow.  It seems likely to me they'll earn at least that much in the next six months.  So conservatively about $120 million of free cash flow without any future growth factored in.  Market cap?  $808 million.  The company has been growing tremendously well so I would expect some upside to that free cash flow in the future.

 

Management owns a lot of stock, they pay half of earnings in dividends.  So it trades for about a 6.4% yield at a really low multiple.

 

They ramp up their marketing spend when volatility picks up (like it has recently with bonds and currencies) and pull down marketing when volatility drops.  As a result they have pretty wide EBITDA margins.

 

Their customers get to trade CFD's on things like Bitcoin and new IPO's.  It is no different in my mind than owning a piece of a casino where the house wins over time.  Especially the case with CFD's.

 

20% of the main customers generate a good 80% of the revenue.  This seems logical in my mind as the big forex traders will be paying spreads on massive positions and turning over accounts a few times a day.  The spreads at PLUS are better than most other forex shops.

 

They are also regulated by the FCA which a lot of forex brokers are not.  So people who have been burned over the years seem to like dealing with PLUS.

 

Shares took a hit from a publicly followed short seller who has a hunch that PLUS is scam given how much cash flow they generate relative to other brokers.  Maybe someone else has more of a substantiated case against PLUS, but it looks like misjudging how well management controls marketing and affiliate costs and provides great mobile platforms to make it easy for people to trade.  They make it fun for people to gamble and they are pulling in a lot of customers and having their existing customers trade more.  Seems to make sense to me.

 

I am going to open up a reasonably sized position and keep digging into it to potentially buy more.  If anyone has any thoughts I would love to hear it.  I have a lot of other numbers from filings and company presentations, but back of the envelope on this seems sufficient for now.

[yadayada]

What about KYC rules being violated. Apparantly they did not ask people for a copy of their ID up front, but only after a cash out.

 

And it trades at about a 6.5x FW EV/FCF yield I think. But isn't this a bull market thing? People jump in this kind of thing when the market heats up, and with a market crash you will see a huge drop in # of customers? So one, you need growth, and two you need the market to not go down a significant number of the next few years?

[writser]

I had an account at Plus500 years ago to profit from a signup bonus. In general, I think the forex retail business is extremely shady, as was demonstrated by the aftermath of the Swiss Franc massacre. FXCM almost goes broke, Saxo is ripping off their clients, etc. Somehow Plus500 escaped without significant losses - I don't know whether they were incompetent and extremely lucky, have excellent risk management or are lying / defrauding customers. I lean towards the first option. The FT featured a (slightly negative) series of blogposts on Plus500: first article, second article . Fascinating quote:

So, one final point to ponder. Plus500 has a market capitalisation of £700m ($1bn). It is on course to report more than $200m of revenues for 2014. Yet this technology upstart reported capital expenditure in 2013 of just $92,000. In the first half of 2014 it invested $83,000. Generating so much money with so little investment, now that is magic.

 

According to the numbers this could be a great business but I have quite a bit of experience with online gambling / cfd / poker sites and I am really skeptical about the average business in this field. As a commenter on the FT blog said:

 

A difficult call.  On the one hand, it checks all the boxes- stupendously profitable (50% margins!), black box business, AIM-listed, complex network of pan-European shell entities, vacant offices, trades at a incredibly low multiple despite rapid growth and high net income (always a bad sign).

 

You can add to that: apparently excellent risk management, no capital expenditure required, heavily depends on affiliate marketing, had to pay FSA fines, CEO left right after listing, Cyprus authorities released warnings that Plus500 wasn't licensed. etc. Basically this name just ticks too many 'too good to be true' and 'hairy' boxes for my taste while operating in a shady industry. Kind of reminds me of some of these Chinese reverse merger stocks. I really wouldn't be surprised to see a) huge customer churn b) a regulatory crackdown or c) they are cooking the books.

 

You might have a very good point if you say that I'm too lazy to do actual research and have preconceived notions but there are other fish in the sea - fish that are less likely to cause me a headache. If it looks this hairy I'm simply not going to bother - cheap or not. I can't convince myself 100% this is not a fraud or has other huge issues I am not aware of. I wouldn't short it either - simply not sure either way.

 

For the bulls: a Numis brokerage report issued after the CHF action: link

[alwaysinvert]

I know nothing about this business but like writser I'm very wary of these kinds of businesses. One thing to do before committing to a position is at least try them out with some trades and withdrawals (slow on withdrawals is a HUGE red flag). There's just so much opportunity for people in the organization to fall prey to greed and compromise the entire business. I also really don't like Cypriot companies.

 

Sadly, like online gambling these businesses often comprise of roughly the same kind of people that are their customers, which is not good for corporate governance, risk management or really anything at all.

[writser]

New FT article:

 

http://ftalphaville.ft.com/2015/02/10/2110642/the-reviews-are-in-for-plus500/

 

Again, everything looks dubious enough for me to pass.

[writser]

Another one:

 

http://ftalphaville.ft.com/2015/02/25/2120227/counting-customers-at-plus500/

[peter1234]

Another one:

 

http://ftalphaville.ft.com/2015/02/25/2120227/counting-customers-at-plus500/

Good find. Interesting definition of active customer as making at least 1 trade per year.

[Picasso]

I sold out of my position for the roughly 50% gain even though I think this can perform well in the future.  There are some shady bits of the business that can be problematic but for the most part they're doing a lot of things right.  But a business model based on 90% of their customers losing is a bit difficult to stand behind. 

[writser]

http://ftalphaville.ft.com/2015/05/18/2129697/plus500-the-big-freeze/

 

Plus500, the Israel-based and London-listed contract for difference provider, has suspended the trading accounts for more than half the customers of its UK business until they prove their identity, a key requirement of anti-money laundering regulations.

 

Shares -35% or something. Might be a nice buying opportunity for those still interested.

[bantrader]

http://ftalphaville.ft.com/2015/05/18/2129697/plus500-the-big-freeze/

 

Plus500, the Israel-based and London-listed contract for difference provider, has suspended the trading accounts for more than half the customers of its UK business until they prove their identity, a key requirement of anti-money laundering regulations.

 

Shares -35% or something. Might be a nice buying opportunity for those still interested.

 

Agree with you @writser, it's a nice buying opportunity:

- No changes in strong balance sheet

- No changes on fundamentals of the company

- Maybe some accounts will be closed because of this requirement

- The company will continue generating generous cash flows

- This kind of short term volatility are opportunities to buy some shares

[Andy Dufresne]

Disclaimer:

 

1. No position ever;

2. I personally know the two main founders, though I have not spoken to them in a few years;

 

@bantrader

 

Disagree this doesn't change the fundamentals of the company for 2 reasons:

 

1. In order to process documentation upfront as the FCA wants instead of when someone wants to withdraw money (which is maybe for 5-10% of their customers in my estimation), as they've done to this point, they require a good additional amount of G&A expenditure - remember they recruit roughly 350 new "players" per day (33K in Q1) and the documentary burden for so many people isn't small. Also, these employees need to be of a certain standard and located in the UK, which is more expensive for the copmany.

 

2. Because of the increased regulatory burden upfront, the company will convert fewer free customers to paying ones. I have no idea how significant this is, but I suspect its somewhat meaningful otherwise they would have done this earlier rather than risking this warning shot from the FCA. Add to this paying customers who will leave and many that will not join as the company has suffered a PR blow and perhaps the profitability and cashflows are seriously lowered. I saw someone estimate them losing 40m revenues, which is 15% of their FY2014 revenues - not an insignificant amount IMHO.

 

@wrister

 

I agree that this is a sad churn business, where suckers don't die they just rotate. However:

 

1. The two main founders (MD Alon Gonen and CEO Gal Haber) are top notch and extremely capable - they know their market, their customer, their product and their marketing. I would not bet against them - they have always made money and have always found a way to improve. Here is an English version of the only media interview I know of with Gonen:

 

http://www.globes.co.il/en/article-alon-gonen-we-want-to-make-plus500-big-1000990800

 

Before PLUS500 these guys had an online gambling business which they sold as they perceived it becoming too tough in terms of regulation / inability to get funds from players due to credit card companies' restrictions. They just understood that CFD is legal gambling and that they could do it better.

 

2. Gambling has always had a place in human history and this shall continue. If WEB and CM have taught us something its to look for recurring behaviors, which lead to predictable cashflows. In this growing online legal gambling / CFD trading world there is still a good amount of room.

 

Just my 2 cents ...

[bantrader]

Disclaimer:

 

1. No position ever;

2. I personally know the two main founders, though I have not spoken to them in a few years;

 

@bantrader

 

Disagree this doesn't change the fundamentals of the company for 2 reasons:

 

1. In order to process documentation upfront as the FSA wants instead of when someone wants to withdraw money (which is maybe for 5-10% of their customers in my estimation), as they've done to this point, they require a good additional amount of G&A expenditure - remember they recruit roughly 350 new "players" per day (33K in Q1) and the documentary burden for so many people isn't small. Also, these employees need to be of a certain standard and located in the UK, which is more expensive for the copmany.

 

2. Because of the increased regulatory burden upfront, the company will convert fewer free customers to paying ones. I have no idea how significant this is, but I suspect its somewhat meaningful otherwise they would have done this earlier rather than risking this warning shot from the FSA. Add to this paying customers who will leave and many that will not join as the company has suffered a PR blow and perhaps the profitability and cashflows are seriously lowered. I saw someone estimate them losing 40m revenues, which is 15% of their FY2014 revenues - not an insignificant amount IMHO.

 

@wrister

 

I agree that this is a sad churn business, where suckers don't die they just rotate. However:

 

1. The two main founders (MD Alon Gonen and CEO Gal Haber) are top notch and extremely capable - they know their market, their customer, their product and their marketing. I would not bet against them - they have always made money and have always found a way to improve. Here is an English version of the only media interview I know of with Gonen:

 

http://www.globes.co.il/en/article-alon-gonen-we-want-to-make-plus500-big-1000990800

 

Before PLUS500 these guys had an online gambling business which they sold as they perceived it becoming too tough in terms of regulation / inability to get funds from players due to credit card companies' restrictions. They just understood that CFD is legal gambling and that they could do it better.

 

2. Gambling has always had a place in human history and this shall continue. If WEB and CM have taught us something its to look for recurring behaviors, which lead to predictable cashflows. In this growing online legal gambling / CFD trading world there is still a good amount of room.

 

Just my 2 cents ...

 

Thank you for your point of view

 

Great link with the interview with the founder.

[writser]

Looks like Gotham Research is getting involved too: https://twitter.com/GothamResearch  . The saga continues :) .

[bantrader]

Looks like Gotham Research is getting involved too: https://twitter.com/GothamResearch  . The saga continues :) .

 

In this case , Gotham comments are very superficials.

Gotham is not providing strong short thesis here,

They just want to jump on the bandwagon with some beginner techniques such as retweeting a tweet from a recently created twitter account with only one tweet in the track record ..... It seems a bit suspicious to me.

 

Take a look on the last retweet from Gotham:

 

 

 

[writser]

The saga continues. For those interested, a new 10-part blogpost from somebody short Plus500: http://www.cablecarcapital.com/your-capital-at-risk-part-1/ . Latest FT post: http://ftalphaville.ft.com/2015/05/19/2129746/where-are-plus500s-customers/ . Shares down 65% over a couple of days.

[Andy Dufresne]

Trading suspended in the stock:

 

http://www.investegate.co.uk/aim/plus/suspension---plus500-limited/201505221015360352O/?fe=1&utm_source=FE%20Investegate%20Alerts&utm_medium=Email&utm_content=Announcement%20Alert%20Mail&utm_campaign=AIM%20Alert

[magno111]

Short thesis about PLUS 500

 

http://www.cablecarcapital.com/your-capital-at-risk-part-7/

 

 

[Andy Dufresne]

Short thesis about PLUS 500

 

http://www.cablecarcapital.com/your-capital-at-risk-part-7/

 

I believe writser had the same link to the short thesis 2 posts prior to yours ...

[Andy Dufresne]

PLUS statement:

 

http://uk.advfn.com/news/UKREG/2015/article/66981514?xref=newsalerttweet&adw=1126416

 

Trading to be continued now:

 

http://uk.advfn.com/news/UKREG/2015/article/66981500?xref=newsalerttweet&adw=1126416

[Andy Dufresne]

PLUS bought out for 400p per share by Teddi Sagi

 

http://www.globes.co.il/en/article-teddy-sagis-playtech-buys-troubled-plus500-1001041056

[writser]

The deal fell through today (link). The saga continues.

[LightWhale]

Stock nosediving more than 30% on 2019 guidance, which they say should come "materially below" market expectations. Currently analysts expect 2.32 pound per share. Take a safety margin such that "materially below" = -40%, that's 1.4 pound a share, on 11.40 price, forward p/e is 8x. I believe they will do better, which they almost always have. The company is debt free and has great operators. Started a small position.