Excellent Analysis of Plus 50031 Oct 2018 15:55
-The volatility we are currently experiencing is not “normalised” but exceptional. These are ideal trading conditions for Plus
• Market conditions have gone from exceptionally poor at end of Q3, to exceptionally good through start of Q4* without stopping to normalise. It is hard to overstate how material this is
• My understanding is that September (see below for relevant analysis of July and August) was “low volatility on low volatility”. This means that broad trading conditions were terrible but that this was amplified further in relation to core instruments specific to Plus
• Despite these severe headwinds + the advent of ESMA, the business still held its own and delivered $100m for the Quarter
• The Liberum broker has held Q4 Revenues flat on Q3 at c.$100m. He acknowledges in the note that this is very conservative. I believe he’s acting on instructions from an exceptionally prudent and cautious management team here
• I say this because he states that management guided that even Q3 would have produced c.130m of Revenues with normalised volatility
• If the business can manage $100m with the Q3 market backdrop as it was, would have done c.130m** under normal market conditions, what can it do in the exceptional market conditions that are the “here and now”?
-130-150m of Revenue in Q4 and the bridge to 580m next year
• Just as low volatility compounds on itself and sinks all boats (making the $100m in Q3 all the more remarkable); high volatility does exactly the opposite
• Not only do revenues surge in and of themselves, but other relevant underlying KPI’s get a serious push in the right direction, which then pushes top-line higher again
• For example, New Customers were flat in Q3 on Q2, but churn rates were intriguingly low, meaning the business was still pregnant with new customers at the beginning of October. A surge in volatility sparks these new customers into action
• The EPC on-boarding process also gets a significant stimulus. Volatility incentivises those eligible to get on and jump through the hoops, so they can get on and trade. That drives ARPU
• The trading update acknowledges that Q4 has started “encouragingly”. The Plus management team are notoriously careful with their wording. For “encouragingly” read “well”
• ESMA is here to stay, but every day is a day that this (excellent) management team get a better bead on how best to mitigate its effects and turn the new regulations to their advantage
• So, in my view, any switched on Fund with a short position in Plus now has to face up to the possibility of an exceptional Q4 (if within the parameters of the new regulatory framework)
• And, just as a Bull needs to sensitise down, a Bear needs to sensitise up
• The prospect of a $150m fourth quarter, quite simply, shouldn’t work for the shorts
• Anything >$130m puts the business on a run-rate for next year of $520m minimum, and that in turn is a clear bridge to the $580m Liberum have in their forecasts for 2019 FY Est
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