Plus500 was established in 2008 by the Founders. The Group has developed and operates an online and mobile trading platform within the CFD sector enabling its international customer base of retail customers to trade CFDs on over 2,200 underlying financial instruments internationally. The Group currently offers CFDs referenced to equities, indices, commodities, options, ETFs, cryptocurrencies and foreign exchange. The Group’s offering is available internationally with a significant market presence in the UK, Australia, the EEA and the Middle East and has retail customers located in more than 50 countries
Business Model
The Group generates its trading revenue from dealing spreads charged on trades executed with clients, overnight charges levied on open customer positions and net gains or losses from its trading activity. Advertising and marketing expenses accounting for over 60% of the operating expenses, of which the CFO states is entirely discretionary in nature, instead representing growth expenditure rather than operational maintenance. The remainder of these expenses relate primarily to corporate costs such as payroll etc. As a result EBIT margins tend to consistently be above 40%
Management
Key members of the board own ~12.5% of the company's shares outstanding. Furthermore, most of the founders of the group still operate within the parent company or subsidiaries such as Gal Haber etc. Remuneration as outlined above accounts for a relatively small amount of the total operating expenditure due to the high-margin cost structure outlined above
Capital Allocation
The policy in regards to shareholder returns is to return a maximum of 60% of net profits to shareholders through a mix of dividends and buybacks. Of which, a minimum of 30% of the net profit has to be a dividend. I should mention that operating cash flow conversion tends to be very high. So as mentioned earlier, the business also doesn’t require capital expenditure and as a result the remaining 40% is retained by the company or used for the current share repurchase plan
Key Risks
The vast majority of the Group’s revenue depends upon the maintenance of licences from regulators.
Increased regulatory scrutiny of the industry in which the Group operates could adversely affect the Group’s revenue, business and profitability.
This has occurred recently with significant leverage reductions in the EU and Australia.
Customer complaints may affect the Group’s business and operations, therefore reputation is key.
The Group may be held liable for the activities of its affiliates under the “500Affiliates” programme
Financial promotions regimes and other regulations may impact the Group’s ability to advertise.
Again this has been enforced by the EU, limiting the ability to aggressively market CFDs.
The Group faces significant competition in the online financial trading business such as CMC, IG & Saxobank all competing with the group for market share.
Reduction in trading volume and market activity and low market volatility could harm the Group’s profitability
The Group’s customer, geographical and product sector focus could leave the Group exposed to certain concentration risks
Systems failures, breaches or delays could materially harm the Group’s business. Also the group is partially dependent on third party suppliers for data sources etc.
Summary Thesis
Plus500 is a business with a unique position to be had in a portfolio. I think the stock is significantly undervalued with free cash flow representing ~15% of the market cap, of which it has grown at a 45% CAGR since the IPO in 2013. Couple this with a capital light business model (Little to no Capex and fixed assets), no debt, very large operating margins and the stock is no doubt fundamentally attractive. Capital allocation is also aligned with shareholder interest with cash flow being filtered into dividends and share buybacks. The risks are prevalent in competition and regulation however i deem these to be largely overstated given a reduction in leverage actually assists reputation and reduces customer churn, albeit reducing short term revenues in the process.