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Yep we’re on the same page gg.
Simple - Interested to hear why you think CTP is negative? We’re told ‘revenue, in particular CI, is strong’. My read is that CI is clearly performing well, but can’t read into whether CTP is positive or negative, just that CI is driving the majority of revenues. I also would’ve thought days like yesterday are materially profitable for PLUS.
@sbb - Rob heads up PLUS’ investor relations team and was responsible for drafting the update, so the insight gained from him is a lot more informative than ‘some clerk’ as you suggest.
I think all on here agree the update was a positive, there is some disagreement as to just how positive based on the wording. For what it’s worth, I agree about plus being a net beneficiary from continued volatility into the year end, but it’s always good to continuously assess the risks (including clarifying comparatives as gg did) to avoid sitting in an echo chamber.
For me the confusion was on the comparative - Active customers have grown but against 3Q19 or 2Q20 (ie y/y or q/q). The first is not impressive, the second is very impressive.
Fundamentally though, PLUS would not produce a trading update if it didn’t have to. The existence of one means PLUS is either trading ahead of expectations or profit warning and there was nothing in the statement to suggest it was the latter.
Peel Hunt’s coverage of PLUS is remarkably poor, so I pay no attention. Worth noting Autonomous upgraded IG‘s FY21 (May year-end) EPS by +21% today post their results. I struggle to see how that doesn’t result in similar upgrades for PLUS given they are exposed to the same trends, but none has been forthcoming yet.
ggplyr - No problem. On PLUS’ platform they show you the % of transaction value that are buyers and % who are sellers. In an ideal world for PLUS this is 50:50 as they internally net off all risk, however this rarely happens (especially in single stock CFDs). Tesla has ~83% buys and 17% sells. Therefore PLUS’s exposure is 17-83= 66% net short as there are more buyers than sellers on their platform and they take on the risk to make up the difference. Gold has 64% buyers and 36% sellers, so PLUS are less exposed here at 28% (but still net short). This is obviously a crude way of estimating their exposure because you have no idea how often these positions are turned over or the value traded on each instrument. But these figures don’t change materially and so it does give you an idea on sense of direction for PLUS’ market risk.
Mark - I hold the stock because of the long term value I see in it, but the market has shown that in the short term, near term data points like customer losses does affect it. This isn’t surprising given the size of (6 weeks of) customer losses to June 8 at 18% of enterprise value. So I’m trying to understand where this is currently at and whether that is driving the share price (because the market was right back in early June as the shares sold off with a large customer loss). It won’t make me sell my holding, but it might make me change my positioning (whether I reduce or increase) so I can buy/sell if I am right.
Agreed on the need for a trading ahead statement from the company. Remarkable H2 forecasts are as low as they are given Q2 customer numbers and likely high deposits from customers.
Fair point re timing of IGG results.
Gold has returned ~10% (on 20x leverage) MTD, but PLUS’ net position has only been ~25% (vs most stocks: ~90%+). Bitcoin has returned ~20% (PLUS is net short ~65%), but only on 2x leverage. The timing doesn’t really add up on these either (although gold took off from the 15th). Anyone aware of PLUS’ historic CFD type exposure - I notice XTB is predominantly indices followed by commodities.
Tesla is another option - it has appeared on most popular instruments most days this month and rose ~40% in the first three weeks. But over the past week has come off 7% and PLUS sold off from the 7th (~25ppt of the 40ppt gain was in the first week), so timing doesn’t match up.
I personally don’t doubt the H1 fundamentals (especially around EBIT margin and capital return) and nothing has changed on to alter the market’s view of H2 (ie volatility is still heightened and the risk is it softens).
Always good to try and understand what’s driving the bear case, so if anyone has any more thoughts they’d be welcome. I hope the move is just the market getting it wrong/traders selling but it’s always dangerous to assume the market is wrong.
I’m trying to think around share price weakness since the post-close update. It was a good indicator in early June that something was wrong (larger customer losses) and don’t want to be blindsided again.
The only thing I can think of is disappointment on dividend announcements from IG and XTB (today), despite appearing well capitalised. There’s a chance regulators are taking a tougher line with CFD providers behind the scenes, hence a lower payout ratio to signal prudence/ not profiting from the pandemic.
Does anyone have any insight on calculation of/minimum capital adequacy ratios at any of the CFD providers? Given PLUS has to return minimum 60% of net income, it appears to give them more scope than IG/XTB (who have no minimum % of profit/14% adequacy ratio minimum threshold).
Happy to help re the explanation.
A very strong revenue print, 4% ahead of my forecast and >20% ahead of consensus. The other positive to note is that this beat was driven by a mixture of record spread income (will need to look out for customer deposits at HY as a good forward indicator of future revenue) and customer loss unwind (100% margin, so higher EPS/dividend).
So Wirecard is positive for PLUS in 2 ways:
1. High profile fraud generally drives higher retail trading volumes (look at Hertz and Luckin Coffee this year). We know this was the case with PLUS as Wirecard was on the most ‘Popular Shares’ and even appeared on the ‘All Popular’ list (with oil, indices, major FX pairs etc). So we know people were trading wirecard stock. We also know PLUS was net short (~60%). So if one of the most popular instruments is falling in value, we know PLUS will have made some customer money back on this (although leverage restrictions were in place by the end of it);
2. Wirecard created headlines and headlines tend to drive customer adds. More customers = more spread income.
Sorry I wasn’t clear on mean reversion - I meant one of the most common retail trading strategies is mean reversion (I.e. it’s fallen x%, it must go up). It was a key driver in the retail rally in May that hurt PLUS (likes of carnival, Hertz going up without any fundamental basis).
You are right that you cannot accurately forecast the customer P&L, especially over a longer timeframe. However, we can look at historic price moves in the quarter just gone to get a feel on ‘sense of direction’. Retail stocks up in May = Bad for PLUS. Retail stocks down in June = Good for PLUS.
Spread income far more material anyway.
I have Customer Spread Income of $337m, Net Revenue $236m, EPS $0.97 and 1H divi of £1.18.
Think there is upside risk to that net revenue figure - $150m customer trading loss could have unwound materially more (than 33% forecast) since June 8 given popularity of the ‘mean reversion’ trade and the Wirecard saga.
The issue with negative rates for insurers isn’t the cash held at bank, it’s that these drive risk free rates lower which are used to calculate the present value of liabilities. The smaller the rate, the larger the liability and so the bigger the loss/worse capital position.
Agreed with the comments on management changing strategy to unlock value though.
My biggest issue at the minute is Aviva’s exposure to real estate (especially commercial). They’ve written residential/ commercial down by 12-15% in Q1 (good to be proactive) but office space (move to work from home/shared space) and retail space (even ‘defensive’ sub-sectors like supermarkets have now had their e-commerce divisions uptake accelerated) are structurally impaired (bad as life insurers often take on long duration loans to back their long duration annuities) but they also have an income problem as I imagine a lot of tenants are not paying. At some point - I don’t know what % of tenants not to pay it would require - they will need to firesale assets are below NAV to raise funds to pay these expenses. So they’re left with an IFRS profit, cash flow and S2 SCR problem. They also have exposure to property their REIT corporate bonds and their property funds.
Would’ve liked to hear more from management about how they plan to manage this risk and welcome any views from anyone on here on this.
The reason I’m less convinced the trading P/L is split 50:50 is because QTD indices are up materially and yet PLUS are still running a trading profit. So if indices have reversed direction to run against PLUS’ exposure (albeit only a factor of the fall), yet PLUS are still earning a profit, I think the balancing figure must be an outsized contribution from volatility (also only a factor of March levels).
Looking forward, given the pick-up in vol this past week and with markets dropping, PLUS has likely experienced another performance boost. Consensus hasn’t come up anywhere near enough to reflect the reality (hence management having to put out 3 unscheduled updates in 6 weeks) and so I can see another trading update in the next fortnight acting as a further share price catalyst.
Agreed that active customer numbers aren’t a good reflection of performance.
Fair point re natural run rate, I’ll look to update my weighted customer numbers based on that.
I also agree on the impossibility of forecasting the trading P/L but I do think people miss a trick here that volatility benefits PLUS hugely:
1. Spreads widen so revenue per trade increases;
2. It presents traders with more ‘trading opportunities’ so drives higher trading volumes and new adds;
3. (This is the misunderstood point for me) Volatility provides a massive boost to PLUS’ trading P/L for two reasons: 1/. It results in unanswered margin calls on both sides regardless of daily market direction which accrue to PLUS’ bottom line and 2/. The more people try and time wild moves, the more likely they are to be on the wrong side of it (as opposed to a buy and hold strategy). This is one of the reasons PLUS’ trading P/L trends to 0 over time despite rising markets and PLUS being net short most assets. On average, PLUS will have a stronger trading P/L in a volatile market that rises 10%, than a benign market that rises 10%.
Happy to explain the link between volatility, margin calls and trading P/L if unclear.
I completely disagree that the actives in the previous quarter are irrelevant - they are essentially your starting customer base. The active customers disclosed is your finishing total. Therefore attempting to normalise/weight the customer base (in my case taking an average of the start and finish positions) makes sense to me.
Having said that, assuming new adds only traded for 20% of the quarter is a sensible approach (My method inherently assumes 43%) as you do actually seem to be trying to normalise the weighted customer trading base (you arrive at Q1 weighted ARPU of $1,835 I get $1,600 ex Trading P/L so not miles apart). Unfortunately I don’t have enough conviction in the assumptions to be as precise.
If you can get down to that granularity of detail though to weight the customer base, I’m interested to hear how you deal with the below assumptions as it is an improvement if you can forecast the weighting with more certainty:
1. What % of the quarter’s new adds have traded for?
2. How you deal with the above question for reactivated accounts?
3. Do you take a view on PLUS’ Trading P/L?
Quarterly revenue progression of roughly: $500m, $300m, $200m. Q3 and Q4 benefit from H1’s expected higher active customers base and marginally above average volatility (Vix: 25).
Focusing on Q2 numbers therefore makes sense. This is made up of active customers and ARPU. Active customers is a function of new adds and churn rate. Given the oil price volatility this quarter and the fact COVID lockdowns only applied to 1-2 weeks in Q1, I think we see stronger net adds (forecast: 100k) and this is born out by the web traffic in April (a record month 4% higher than March and 89% higher than Jan/Feb). I have less conviction on the churn rate given the ability of old customers to reactivate accounts (as they did in Q1 with a negative churn), but I forecast it at 15% as some of the early acquired, less valuable customers are churned off the platform. This leaves me with 260k active customers for the quarter and the web traffic regression I use supports this figure (although I caveat I don’t have enough data points to make this significant, so I view it as another ‘piece of the puzzle’).
The other variable is ARPU. PLUS have a funny calculation for ARPU as they divide total revenue earned across the quarter by the number of active customers over the quarter. The problem with this is that if you have a quarter where recruitment was skewed to the last month/weeks, ARPU will look lower (as we saw in Q1). I therefore look at revenue for the quarter and divide by average active customer numbers for this quarter and the previous one. When you regress this against a home made volatility index (I use 81.5% VIX and 18.5% OVX - oil price volatility measure), you get an expected ARPU. A few caveats on that: 1/. Why so specific on each measure? Because when I’m looking for the highest R^2 over time, this was the best mix I found; 2/. Quarters like Q1 are going to be anomalistic because whilst taking average active customer numbers improves this measure, ARPU is skewed by a surge in new customers who PLUS have been unable to realise much of their revenue/lifetime value in the quarter. This actually gives me more comfort that the ARPU could beat my expectations this quarter as PLUS entered it with a strong, under-traded cohort and volatility existed at the start of the quarter, likely driving new adds higher at the start of April; and 3/. My R^2 is 0.623 for homemade index and 0.598 when using VIX alone. Whilst not brilliant it does have data points going back to 1Q16 and the VIX R^2 improves to 0.9571 when excluding data points with volatility index <15. This suggests ARPU of $2,100 but I assume volatility falls through May and June and I arrive at a $1,900 ARPU.
1,900 * 265k = $500m
It’s worth noting that it would be helpful to see the EPC customer and revenue breakdown as PLUS used to disclose as Pro clients’ ARPU is materially higher than Retail clients’ but I think management want to direct our focus towards lifetime value of clients.
Once a user is acquired, PLUS essentially have a variable cost of 0 per transaction and so Revenue per user = Profit per user (important to stress this is only relevant for historically acquired users - new user profit is ARPU less AUAC). Therefore, the 2017 revenue ($437m) represents the value from acquired users. The income from operations includes overheads (such as SGA and marketing) that aren’t relevant to already acquired customer numbers.
So you have $437m in 2017 revs and $310m in 2017 revs from 2015-17 acquired clients. This means the delta ($127m) comes from clients acquired prior to 2015.
Hope that helps.
Your ROI point is a very fair one and I probably didn’t give that slide enough credit originally. For my benefit, is your argument that active customers misses the point because; yes they may have churned quickly, but those that have have already left the platform generated a strong ROI (in a short period of time) which is fundamentally what you care about? Ie whether a customer trades for 3 months or 3 years, actually what I care about is the revenues from that user, not the length of time spent on the platform. So high volatility events only brings forward the churn, it doesn’t diminish the profit earned per user over their lifetime.
If that’s the case, I do completely agree with you. In my model, I increase the churn rate through FY20, but this corresponds with materially higher ARPU to boost profit per user to average lifetime levels and active customers are higher coming out of 2020, than going in.
Re use of cash, their net asset value is almost all cash and so they arguably don’t need to increase this balance further. But given FY18 payout levels were at 60%, I like to build in a level of prudence and hope to be surprised on the upside.
Thanks for the comments.
Re the 60%, I have no real conviction on whether this will be 60 or 80 - my point is that I would expect management to want to smooth returns and so retain some of this cash. If management are of the view that their marketing ROI is greater than 1, then there’s an argument that they create more shareholder value by investing this in future customer acquisition who return a higher discounted profit than their current acquisition cost. As a 2020 shareholder I actually agree with you though - they have plenty of cash and I would like to see 100% returned so I can choose where to allocate my capital. But for me there is a clear counter argument as to why management might not follow that path.
Re the opex vs capex, investing in the platform would go down as capex and boost their intangibles so don’t think this falls under opex? Customer acquisition definitely does you are right, but my point is that they are investing to acquire customers in the future i.e. they need to retain cash to put into customer acquisition/opex in 2021.
Re valuation method, I agree that it is very bearish, it was an exercise in showing a ‘valuation floor’. I think we’re saying the same thing here but please correct me if I’m wrong? I’ve taken FY22 normalised profits (ie independent of FY20), applied their average historic P/E multiple and then added on the FY20 ‘one-off’ earnings on a multiple of 1x.
Completely agreed on the rollover impacts of this increased demand - again I wanted to frame the bear argument and see if it held up to stress, which it doesn’t in my opinion. I would caution on the ROI argument although I know management do like it. If you look at 2018 and the cryptoboom, the majority of users recruited in 1H18 had been churned off the platform by 2H17.
But I think the boosted customer base (I believe this boom is more sustainable than crypto) will churn at a slower rate. I also think management will buyback shares given this will improve their EPS multiples in outyears so they retain some share price support in the future. The increased cash balance also allows future value-accretive investments and makes the stock more attractive on EV multiples.
I’m just surprised more people aren’t seeing this value. I know some investors hide behind the IG ‘quality’ comparisons as a reason not to hold - again that makes little sense to me.