Well placed to ben­e­fit from Brexit chaos, CMC could be a ‘dou­bler’ in a year or two

Spread-bet­ting firms tend to do well when mar­kets are volatile – and its shares look cheap, says James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

NEXT month, Peter Crud­das could fi­nally be parted from his life’s work. The lock-up that pre­vents the founder of the spread-bet­ting firm CMC from sell­ing his re­main­ing 62pc stake ex­pires, three years af­ter the busi­ness was floated on the stock mar­ket. It won’t hap­pen. Mark­ing CMC’S 30th an­niver­sary this year, Crud­das has demon­strated that he is not the kind of en­tre­pre­neur to cut and run. He left school at 15 and set up CMC with £10,000 in 1989. When he tried to step back from day-to-day man­age­ment a few years ago, it did not go well. Crud­das has also as­sured the mar­ket that he has no in­ten­tion of sell­ing. That has a lot to do with the fact that CMC shares have roughly halved since the sum­mer and are a shadow of the 240p price at which they were floated. Two things have gone wrong. A reg­u­la­tory crack­down by the Euro­pean Se­cu­ri­ties & Mar­kets Author­ity (Esma) on con­tracts for dif­fer­ence (Cfds) – which let pun­ters play the mar­kets with­out own­ing the un­der­ly­ing as­set – aims to pro­tect in­ex­pe­ri­enced traders from los­ing too much money by im­pos­ing caps on the lever­age that lets them con­trol a far larger po­si­tion than if they were in­vest­ing di­rectly. CMC suf­fered a steep drop in rev­enue from re­tail clients who were in­el­i­gi­ble to reg­is­ter for pro­fes­sional sta­tus – which would ex­empt them from the new caps – fol­low­ing the changes, which came into force in Au­gust. At the same time, mar­kets were be­calmed over the sum­mer and traders were dis­tracted by Eng­land’s World Cup run, ac­cord­ing to Crud­das, a for­mer Tory Party trea­surer.

There should be plenty of volatil­ity to come, from the un­wind­ing of quan­ti­ta­tive eas­ing in Europe, gy­ra­tions from the on­go­ing Brexit saga and, across the At­lantic, the Fed­eral Re­serve’s strat­egy of rais­ing in­ter­est rates, which caused shares to fall out of bed be­fore Christ­mas. It is enough to make many pri­vate in­vestors sit on their hands – but not those who think they are savvy enough to cap­i­talise.

CMC of­fers clients the full suite of fi­nan­cial de­riv­a­tives, in­clud­ing on­line trad­ing in spread bet­ting, Cfds and for­eign ex­change. Be­cause the firm’s costs are rel­a­tively fixed, any fall in rev­enues ex­ac­er­bates the prof­its drop. So in the first half of the year a 21pc sales fall trans­lated into a 76pc hit to prof­its. Op­ti­mists would say the same should be true on the long road back in the op­po­site di­rec­tion. Op­er­at­ing profit in 2021 is still fore­cast to come in at less than the £68m de­liv­ered last year, al­though strong cash con­ver­sion sug­gests the div­i­dend may yet be held in the mean­time de­spite a cut at the half-year stage.

Shore Cap­i­tal, the bro­ker, said the shares had been over­sold and em­pha­sised that client cash lev­els had re­mained steady. Even though the same level of de­posits doesn’t trans­late into the same po­si­tion size be­cause of the new re­stric­tions, traders are at­tempt­ing to man­age their ac­tiv­ity with less head­room than be­fore. It is also worth re­mem­ber­ing that CMC will not be hit by ev­ery new piece of reg­u­la­tion. The com­pany pointed out last month that the Fi­nan­cial Con­duct Author­ity’s mea­sures on re­tail de­riv­a­tives and op­tions largely mapped Esma’s work and a con­sul­ta­tion on a po­ten­tial ban on the sale of cryp­tocur­rency Cfds would not have a ma­te­rial im­pact.

Peel Hunt, an­other bro­ker, in­cluded CMC in its “dou­blers” list for 2019

– a hand­ful of stocks it said had the po­ten­tial to dou­ble in value in two or three years. The bullish­ness of its team sug­gests op­er­at­ing mar­gins can steadily in­crease from a low of 22pc this year to 37pc as rev­enues rally. CMC could ultimately ben­e­fit from the pre­dicted con­sol­i­da­tion of the in­dus­try.

There are high hopes for fur­ther di­ver­si­fi­ca­tion too. CMC has qui­etly built an in­sti­tu­tional trad­ing busi­ness. A deal with Aus­tralian fi­nan­cial ser­vices group ANZ to pro­vide a white la­bel stock­broking ser­vice also shows the way. In July, 103 in­ter­me­di­aries were moved to CMC’S trad­ing plat­form and ANZ’S 250,000 re­tail stock­broking clients fol­lowed in Septem­ber. CMC has pre­dicted that the part­ner­ship, which show­cases its tech­nol­ogy cre­den­tials, will de­liver an­nual prof­its of £7m.

Trad­ing at about eight times next year’s fore­cast earn­ings, CMC shares are an in­ter­est­ing way to play the tu­mult to come.

Questor says: buy

Ticker: CMCX

Share price at close: 116p

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