Venture: Mid-Cap Financial

Issue 13;

A cash cow.

Plus500 (PLUS)

“Plus500 is a global multi-asset fintech group operating proprietary technology-based trading platforms. Plus500 offers customers a range of trading products, including Contracts for Difference (“CFDs”) and share dealing, as well as futures and options on futures in the US. Plus500 has a premium listing on the Main Market of the London Stock Exchange (symbol: PLUS) and is a constituent of the FTSE 250 index.”

It's a spread better that throws off cash and is significantly undervalued, mainly because it’s an Israeli gaming stock. Yet it has been an excellent execution, as it has left its main rival, IG Group (IGG), for dust.

IGG vs Plus

What is perhaps even more surprising is how low the price volatility in the sector has become. PLUS shares have a history of regulatory crashes, but things have settled down. The share price volatility has fallen into the quality camp, which is remarkable. See how it has become similar to Diageo (DGE).

A Calmer Sector

That could be because the balance sheet is bulletproof. It reports in US dollars, and holds a remarkable $849 million of cash and is debt-free. The market cap is $1.56 billion (£1.24 billion), making the enterprise value $726 million. Now consider free cash flow is expected to be $238 million this year ($528 million in record 2020), and you start to see the extraordinary business this is. And let’s not forget that interest rates are no longer zero, which means that cash pays.

PLUS EV to Sales

The return on invested capital is an eye-popping 42%. Net income margins are 45%. It trades on a 6.9x PE for ’24. The dividend yield is a mere 3.3%, but it’s covered multiple times over. Like many companies that are severely undervalued, they are buying back stock, which also explains the low volatility. The buybacks accelerated in 2019, and they have recouped 30% of their stock since. Expect buybacks to become a price driver from here.  

PLUS Share Buybacks

The company has a high-tech platform and has managed to grow a significant presence against competitors. It is expanding globally with upgraded operations in Japan. The recent trading statement was bullish, and the brokers’ consensus forecasts keep rising. Their forecast is 2206p, against the current price of 1611p, which assumes a 41% upside. To my mind, the investment case is to accept the business cyclicality has been addressed by the strategy of holding high cash and buybacks. The market will rerate the company when they figure out it is no longer a high-risk situation.

Risk

It’s a gaming stock, which scores poorly on ESG credentials. But I think that after 10 years as a public company, they have matured and are a slick operation. The volatility is low due to buybacks and the balance sheet. The shares trade £4 million per day, making it liquid. I deem PLUS to be medium to high risk, but believe the market sees it to be ultra-high risk. That is the opportunity.

Venture Update

BATS took a knock as the company wrote down their US tobacco business by $25 billion as they basically told the world that ciggies were in structural decline. I think we already knew that, but they keep on generating higher sales and profits. The shares yield 10.3%, and there are buybacks. It is dirt cheap but may become a value trap because institutions will never invest in tobacco. That is why the shares are structurally undervalued and may likely remain so. I am more concerned that they are not embracing the recent momo crash, which should have been a positive force for cheap laggards. BATS is on the watch list, but I have decided to hold for the time being.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture