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Writer's pictureMark Watson-Mitchell

CMC Markets – could second half recovery make this company an attractive takeover prospect?

All investors are gamblers – there is just a very wide range of judging what risks are acceptable to their relative portfolios.


We all know that there are various ways of playing against those risks and assessing how to make profitable investment decisions.


Furthermore, it does not just encompass dealing in the UK stock market – you can deal in commodities, currencies, indices, debt, cryptocurrencies, and even in bets against your own portfolio positions.


And that is not just for investors in the UK markets but also for those in countries across the globe.


All this activity is bread and butter for CMC Markets (LON:CMCX) – it operates online and mobile trading services for both retail and institutional clients.


The Currency Management Corporation was founded in 1989 by Peter Cruddas – operating initially as a foreign exchange broker from his one desk, one telephone office.


His business expanded such that by 1996 he launched the world’s first online retail foreign exchange trading platform, which gave retail clients the ability to trade markets that were previously only open to the professionals.


CMC Markets subsequently widened its service offering by becoming a ‘contracts for difference’ broker, then launching an online financial spread betting facility.


International offices followed, first in Sydney, then New Zealand, Germany, Canada, Singapore and Sweden.


Even Goldman Sachs realised that CMC was on to a winner – it took a 10% stake in the company’s equity.


Global growth followed with further offices being opened in Italy, Norway, Spain, France, Warsaw and Shanghai. It has partnerships in more than 25 countries.


By 2015 the company was making nearly £52m in pre-tax profits annually.


The next year it floated on the market, with a value of £693m, becoming a FTSE 250 constituent in June 2016.


Today CMC Markets clients can trade in over 90 indices, on some 330 foreign exchange currencies, over 9,000 shares and exchange traded funds, around 110 commodities, and over 50 different treasuries.


The group, which provides leading-edge technology and execution, also offers its platforms by way of ‘white labelling’ for banks, brokers, funds and trading desks.


The company’s Next Generation trading platform offers its clients excellent investing tools, including charts for technical indicators, with clever drawing tools, and the ability to deal straight from those charts through their desktops or mobiles.


In the 2018/19 year it handled around 65m trades for its 53,000 plus active clients – the value of their trades totalled £2,259bn.


The group operates very tight compliance and auditory controls. Its balance sheet is strong, which is very positive when operating in so many countries across the globe.


Peter Cruddas owns just over 60% of the group’s 289m shares in issue.


A spread of institutions own another 30%, with holders including: Aberforth Partners (5.85%), Schroder Investment Management (5.09%), JO Hambro Capital Management (4.87%), BlackRock Investment Management (3.11%), Norges Bank Investment Management (2.96%), Standard Life Investments (2.14%), Legal & General Investment Management (2.02%), Pelham Capital (0.66%), and The Vanguard Group (0.65%).


In the last couple of year’s the group has had to contend with lower dealing volumes, especially in CFD’s, coupled with various regulations coming into play in its markets.


In the year to end March the company reported revenue down from £187m to just £131m, with pre-tax profits falling drastically from the 2017/18 year’s figure of £60.1m to a mere £6.3m for 2018/19. Earnings fell from 17.3p to just 2.0p, however, the previous 8.93p dividend was chopped to 2.03p per share (above earnings – a confident recovery signal?).


The first-half trading update, which was issued two weeks ago, declared that it had enjoyed a much stronger trading revenue in the six months to end September. Net revenue is confidently forecast for the year of £170m plus, with operational leverages helping to kick in bigger profits. The interims will be published on 21 November.


Estimates had been for £162m revenue and £25m pre-tax profits, but now brokers are expected to increase their expectations. Those profits would have seen earnings more than trebling to 7p per share and a 4.3p dividend.


Although markets are notoriously tricky making guessing a mugs game – even so perhaps £170m could push pre-tax profits up to £36m, which would be worth around 11p per share in earnings, and a possible 5.5p dividend.


With the shares trading at around 127p, that values the group at £367m, which is less than half of the value of when it went public in 2016. There is a lot going on in the financial services sector, especially on the mergers and acquisitions front – so could its current rating make the company wide open to a predator?


The question is – could the company possibly see a real bounce back in its fortunes, sufficient enough to mirror its 2018 figures? If so then that means that its shares are looking very cheap indeed. I now fix a 180p Target Price.


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