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
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
Share price at close: 116p