Plus500 is an international CFD (Contract For Difference) provider, offering CFDs across more than 2,000 securities and asset classes. A CFD is a type of derivative trading which allows you to gain exposure to a share or commodity without actually having to own the underlying asset. Essentially it’s a contract for the difference between the price of an asset when you open the position and when you close it. For example if you take out a long CFD against 10,000 shares of stock X at £1 per share, if that stock then rises 20% and you close the position at £1.20 you will have made a profit of £2,000 on the contract which will be credited to your account. Vice versa if the share drops 20% and you close the position at 80p you will have have lost £2,000.
At this point you might be wondering what’s the point of CFDs, it all comes down to leverage and margin. If you wanted to go out and purchase 10,000 shares in stock x, the traditional way you would need to invest £10,000 but with CFDs you only need a small fraction of that and you still get the same level of exposure. You can consider it like a loan, your being loaned the shares for a deposit and your charged a small amount of interest each day you keep the position open. The best thing with CFDs is they mirror the underlying asset so you even get paid out dividends if the asset pays one. The exact amount of deposit required to open a CFD ranges from 5-25% of the contract value depending on the type of asset. With a 5% margin rate you only need a £500 deposit to take out a £10,000 contract so even with small moves in the underlying assets price it’s easy to make or loose large amounts of money in a short space of time. With all that in mind it’s easy to see why the popularity of CFDs is spreading rapidly across Europe.
Earlier this week Plus500 announced record half year results with revenue coming in at $465.5 million an outstanding 147% increase over last years $188.4 million. EBITDA and net profit were even more impressive coming in a whopping 195% and 189% up over last year at $349.0 million and $261.7 million respectively. With earnings per share coming in at $2.30 (£1.81) for the 6 months ending 30th of June and with the shares trading at £18.32 you might be wondering what’s the catch. It all comes down to new financial regulations introduced by the European Securities and Markets Authority aimed at providing better protection to retail clients trading leveraged products like CFDs. The new regulations included leverage limits, margin stop outs and a prohibition on benefits to incentivise trading such as bonuses.
Because of the new regulations Plus500 has stated that “it is unlikely that the exceptional performance of H1 2018 will be repeated and the impact of rule changes will potentially affect less than half of EEA revenues (30% of Group revenues) in the short term. Overall, our expectations are that Plus500’s outstanding momentum will deliver strong year-on-year growth in 2018, in line with the market expectations.”. Market expectations for the full year currently stand at $625 million in revenue, $425 million in EBITDA and a $420 million profit before tax resulting in earnings per share of £2.84, leaving the shares trading on a 2018 p/e ratio of 6.45. What’s more a total dividend of £2.37 is forecast for 2018 giving the shares a yield of 13%. A slight dip in earnings is forecast for 2019 with earnings per share dropping to £2.58 due to the new regulations but earnings are expected to rebound in 2020. With Plus500 forecast to finish 2018 with with $279 million in cash the shares seem heavily undervalued. IG, Plus500’s closest competitor currently trades on a 16x p/e ratio for full year 2019’s forecasts, if Plus500 were to trade at the same rating you would be looking at £41 per share. Plus500 is certainly one to consider.