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CMC Markets jumps after raising full-year guidance
3rd Oct 2019 08:09
(Sharecast News) - CMC Markets raised its forecast for full-year operating profits on the back of the "strong" net trading revenues observed during the first half of its financial year 2020 on the back of higher income from its technology business and higher sales from its white-label stockbroking business.
For the six months ending on 30 September, the firm said revenues from its stockbroking business were expected to reach roughly £14.0m, up from £5.5m one year ago, driven by increased sales from the various white-label partnerships it had in Australia, of which ANZ Bank was the biggest.
Commenting on the global online trading and institutional platform technology solutions outfit's trading, chief executive officer, Peter Cruddas, said the company was becoming more than just "a CFD business", highlighting the growing income from its technology partnerships.
"It is clear that we are becoming more than a CFD business with income also being derived from technology partnerships, such as the ANZ deal. This is an exciting area of the business which will continue to grow through further planned partnerships," he said.
Cruddas also said clients were adapting to changes in the rules governing minimum margin levels and retaining their interest in the products and the trading platforms CMC offered.
In its CFD arm meanwhile, CMC said that client income was only slightly lower versus a year ago despite unfavourable comparisons.
That was because the comparable prior year period contained four months of trading before the most recent regulatory changes in the European Union kicked-in.
The company emphasised that it was continuing to focus on retaining high value clients in CFDs, crediting "changes to the business model" for its retention of a greater proportion of client income.
Hence, net trading revenues on that side of the business were expected to increase by approximately £22.0m over the half to reach about £85.0m.
Regarding the outlook, management expressed "confidence" that full financial year group net operating income would now exceed £170.0m, alongside higher profits before tax thanks to the company's operating leverage.
Excluding variable compensation, CMC guided towards a "moderate increase" for the latest six-month stretch, "in line with previously announced full year guidance".
CMC also welcomed the expected regulatory changes by the Australian Securities and Investments Commission in the second half of the year "although exact timing is still to be determined".
Analysts weigh in
FinnCap analyst Nik Lysiuk labelled the trading update as a "strong" one, adding that it outlined an evolving business.
"Not necessarily a one trick pony, but the company is still largely exposed to market volatility. Shares are showing strong signs of recovery but it still takes guts to invest in this sector given the market backdrop," Lysiuk said.
"The company is not cutting costs and instead hoping to pick up business in the evolving market by continuing to improve the model. Commendable, but I've always been more attracted to Plus500 given the more entrenched dislike for those shares, which I believe is misplaced. Plus up 7% from the April lows, CMC up 38% in the same period."
The Finncap analyst was forecasting 2020 profits before tax of £24.6m, which would mark an improvement on the £6.3m reached in 2019 but remain well below the £60.1m recorded in 2018, although he said that "these moves should smooth out as the technology income diversifies the business".
Sounding a similar note, ShoreCap analysts Vivek Raja and Paul McGinnis reiterated their 'buy' recommendation and fair value estimate of 130.0p per share for CMC.
They told clients: "From a low of 83p on 16 August, the share price has rallied to 106p so some of today's good news on revenues will already be in the price, given CMC had already mentioned in its 22 August trading update that July trading had been good, and we subsequently learned from IG on 19 September that trading in August had also been robust. The additional disclosure on composition of revenue is most welcome and we look forward to more with H1 2020 results on 21 November after which we will be better able to understand the quality."
And Brexit?
On the potential impact that Brexit could have on CMC or Plus 500, Lysiuk told Sharecast: "With something as complex as Brexit it's obviously very difficult to state whether the benefit will have a net positive or negative effect on these businesses. There's also the question about what 'Brexit' will actually mean, which is still very much up in the air.
"The principal uplift will be the increased volatility in markets from which trading platforms will of course benefit. On the downside, increased uncertainty is likely to continue for some time post Brexit, since the mechanics of our relationship with Europe from that point will probably takes years to finalise. As part of that, there will be a number of regulatory hurdles to overcome for the City generally and all participants within it. CMC has established a subsidiary in Germany to mitigate any loss of passport rights. Plus500 are similarly positioned through the license in Cyprus and the group operates globally, so is relatively less-exposed to the EEA."
As of 0854 BST, shares of CMC Markets were jumping by 6.60% to 113.0p, having already hit an intra-session high of 119.80.
For the six months ending on 30 September, the firm said revenues from its stockbroking business were expected to reach roughly £14.0m, up from £5.5m one year ago, driven by increased sales from the various white-label partnerships it had in Australia, of which ANZ Bank was the biggest.
Commenting on the global online trading and institutional platform technology solutions outfit's trading, chief executive officer, Peter Cruddas, said the company was becoming more than just "a CFD business", highlighting the growing income from its technology partnerships.
"It is clear that we are becoming more than a CFD business with income also being derived from technology partnerships, such as the ANZ deal. This is an exciting area of the business which will continue to grow through further planned partnerships," he said.
Cruddas also said clients were adapting to changes in the rules governing minimum margin levels and retaining their interest in the products and the trading platforms CMC offered.
In its CFD arm meanwhile, CMC said that client income was only slightly lower versus a year ago despite unfavourable comparisons.
That was because the comparable prior year period contained four months of trading before the most recent regulatory changes in the European Union kicked-in.
The company emphasised that it was continuing to focus on retaining high value clients in CFDs, crediting "changes to the business model" for its retention of a greater proportion of client income.
Hence, net trading revenues on that side of the business were expected to increase by approximately £22.0m over the half to reach about £85.0m.
Regarding the outlook, management expressed "confidence" that full financial year group net operating income would now exceed £170.0m, alongside higher profits before tax thanks to the company's operating leverage.
Excluding variable compensation, CMC guided towards a "moderate increase" for the latest six-month stretch, "in line with previously announced full year guidance".
CMC also welcomed the expected regulatory changes by the Australian Securities and Investments Commission in the second half of the year "although exact timing is still to be determined".
Analysts weigh in
FinnCap analyst Nik Lysiuk labelled the trading update as a "strong" one, adding that it outlined an evolving business.
"Not necessarily a one trick pony, but the company is still largely exposed to market volatility. Shares are showing strong signs of recovery but it still takes guts to invest in this sector given the market backdrop," Lysiuk said.
"The company is not cutting costs and instead hoping to pick up business in the evolving market by continuing to improve the model. Commendable, but I've always been more attracted to Plus500 given the more entrenched dislike for those shares, which I believe is misplaced. Plus up 7% from the April lows, CMC up 38% in the same period."
The Finncap analyst was forecasting 2020 profits before tax of £24.6m, which would mark an improvement on the £6.3m reached in 2019 but remain well below the £60.1m recorded in 2018, although he said that "these moves should smooth out as the technology income diversifies the business".
Sounding a similar note, ShoreCap analysts Vivek Raja and Paul McGinnis reiterated their 'buy' recommendation and fair value estimate of 130.0p per share for CMC.
They told clients: "From a low of 83p on 16 August, the share price has rallied to 106p so some of today's good news on revenues will already be in the price, given CMC had already mentioned in its 22 August trading update that July trading had been good, and we subsequently learned from IG on 19 September that trading in August had also been robust. The additional disclosure on composition of revenue is most welcome and we look forward to more with H1 2020 results on 21 November after which we will be better able to understand the quality."
And Brexit?
On the potential impact that Brexit could have on CMC or Plus 500, Lysiuk told Sharecast: "With something as complex as Brexit it's obviously very difficult to state whether the benefit will have a net positive or negative effect on these businesses. There's also the question about what 'Brexit' will actually mean, which is still very much up in the air.
"The principal uplift will be the increased volatility in markets from which trading platforms will of course benefit. On the downside, increased uncertainty is likely to continue for some time post Brexit, since the mechanics of our relationship with Europe from that point will probably takes years to finalise. As part of that, there will be a number of regulatory hurdles to overcome for the City generally and all participants within it. CMC has established a subsidiary in Germany to mitigate any loss of passport rights. Plus500 are similarly positioned through the license in Cyprus and the group operates globally, so is relatively less-exposed to the EEA."
As of 0854 BST, shares of CMC Markets were jumping by 6.60% to 113.0p, having already hit an intra-session high of 119.80.