September Idea Competition - CMC Markets (XLON:CMCX)
Image upload

Summary

  • CMC Markets is a spread betting, CFD and online share trading platform based in the UK and with operations in Australia and Singapore
  • Innovative online and mobile platform aiming to diversify into non-leveraged income streams (investing platform)
  • Highly profitable business model with above 25% profit margins
  • The Company is undervalued using the Graham Intrinsic Value Method

Company

CMC Markets is a high-quality global provider of online trading - shares, spread betting, CFD and FX - offering services to retail, professional and institutional customers. It has leveraged and non-leveraged businesses which complement each other with B2C and B2B offerings.


Image upload
Source: Annual Report 2022

It's most recent annual breakdown of revenue (combined leveraged and non-leveraged) by asset class - Index (28%), Shares (19%), Commodity (17%), FX (18%) and Stockbroking (17%) - and leveraged net revenue by region - APAC & Canada (46%), UK (35%) and Europe (19%), show a well-diversified income stream benefitting the core leveraged business in times of volatility and uncertainty.


Image upload
Source: FY Analyst Presentation 2022


Image upload
Source: FY Analyst Presentation 2022

Market and Competitors

  • Leveraged business: The UK is leading the global ranks for a top CFD market. The market share is split between the following companies - Plus500, IG Group, CMC Markets and other smaller players with marginal share in the ranges of lower single digit %-ages. Plus500 has the leading market share of 18% and IG Group and CMC Markets following in the next 2 places.



Image upload
Source: Plus500 Investor Presentation 2022

  • Non-Leveraged business: CMC Markets non-leveraged business is concentrated in Australia where they are the 2nd largest retail stockbroker and the largest white label provider. Their trading revenue is up 51% vs pre-pandemic normalised levels with a record AuA of AUD $80.2bn.


Image upload
Source: FY Analyst Presentation 2022

Competitive Advantages

  • Well-known and established brand name

The Company has been in existence since 1989 carrying the moat of well established brand name among the UK B2B and retail traders.


Image upload
Source: Annual Report 2022


Image upload
Source: Annual Report 2022

  • Ownership of own technology as a significant differentiator

The Company in-house developed leverage platform will be able to be scaled up in the future by offering non-leveraged solutions across different geographical regions worldwide with the primary focus being the APAC for the next couple of years.

  • Heavily regulated industry

Since 2018-2019, tighter regulations have been implemented regarding requirements for CFD providers by ESMA (Europe) and FCA (UK). There are significant limits introduced for advertising and incentives and also on customer's leverage which will further lead to consolidation within the industry.

Financials

CMC Markets has achieved a top-line revenue growth > 25% (3-year annualised) with a net margin of 22.04% and RoE > 18%.


Image upload
Source: Morningstar

CMC Markets is debt-free and after accounting for the regulator's requirements for equity capital ratio has a net available liquidity of more than £245m.


Image upload
Source: Annual Report 2022


Image upload
Source: FY Analyst Presentation 2022


Image upload
Source: FY Analyst Presentation 2022

Management

The founder and the current CEO, Lord Peter Cruddas, holds the majority of the company's shares (58.4%).


Image upload
Source: MarketScreener

Growth Drivers

  • Broadening the client base and geography

The Company aims to introduce a new investing platform (non-leverage) by the end of 2022 in the UK (and 2023 in Singapore) thus leveraging its in-house technology solutions by broadening the customer base.


Image upload
Source: FY Analyst Presentation 2022


Image upload
Source: FY Analyst Presentation 2022

  • Diversifying the revenue streams

Furthermore, it will be launching physical cryptocurrencies trading in Australia in 2023 targeting 30% growth in net operating income by 2025.


Image upload
Source: FY Analyst Presentation 2022

Multiples and Valuation

CMC Markets trades at P/E (LTM) ratio of 9.1, quite undemanding considering the revenue growth achieved for the past 3 years - Total Revenue CAGR of 29.31%. Clearly, the broader market is not factoring the new revenue and earnings streams that are expected in 2023 from the non-leveraged products in the UK and Singapore.


Image upload
Source: Koyfin

I am using The Graham Intrinsic Value Method (original) with the following inputs:

  • Current Annual EPS: £0.248
  • Expected Long-Term Growth: 5% (which is very conservative)
  • Instrinsic Value Formula: EPS x (8.5+2g)



Image upload

Image upload

Image upload

The current share price of CMC Markets is £2.28. Based on the valuation method used the instrinsic value of the company is at least £4.59 giving it a margin of safety of 50% and a discount to trading price of 101%.


Andre Bester's avatar
Very good write up thank you for your thoughts
Todor Kostov's avatar
@drisie Thanks and good luck with your investing
Al G's avatar
Great article. When’s the next edition comin GB through?
Todor Kostov's avatar
@alg Thanks. It's already in draft mode!
StockOpine's avatar
Great analysis. What are the risks that we should be aware of?
Also the P/E used in the valuation to derive 4.6 per share is a bit on the high side (18.5x) compared to historic and compared to Plus500 and IG multiples. What are your thoughts on this?
Todor Kostov's avatar
@stockopine Thanks for your feedback. The main risks I foresee for the next couple of years are around execution of strategy, i.e. being able to succesfully implement the CMC Invest platforms in the UK and Singapore. This might lead to an elevated operational and technology costs to what has already been communicated on conference calls. This is the non-leveraged business and I hope that their experience from the Australian market will suit them well in that respect.

Regarding valuation, Plus500 trades currently at P/E of 6.27 and IG Group trades at P/E of 8.22. However, these are solely leveraged type businesses which makes the difference. On the other hand, similar type of non-leveraged businesses which CMC Markets will target in terms of market share going forward are Hargreaves Lansdown (XLON:HL), which trades at P/E of 16.95, and AJ Bell (XLON:AJB), which trades at 25.51.

If we use a more conservative valuation and derisk the original Graham's model to 1xg instead of 2xg (thus having a P/E target of 13.5) we still could easily see CMC Markets reprice more than 47% to a share price of £3.35.

Hope this helps and good luck with your investing!
StockOpine's avatar
Thank you for the insights @kostofff . Either way it seems like an attractive entry price. Wishing you every luck as well!
Todor Kostov's avatar
@stockopine Thanks!
Really good insight Todor. Great read!
Todor Kostov's avatar
@sem Thanks for the feedback Sem and happy to connect!
Monika Stratieva's avatar
This level of detail is very useful, thank you for sharing with us.
Todor Kostov's avatar
@mstratie Thanks for the feedback and good luck with your investments!
Todor Kostov's avatar
DISCLOSURE: This is not a financial advice. This material has been
distributed solely for informational purposes only and is not a solicitation or
an offer to buy any security or to participate in any trading strategy. The material may include projections or other forward-looking statements regarding future events, targets or expectations. Past performance is no guarantee of future results. There is no guarantee that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein will be realized or that an investment strategy will be successful. All expressions of opinions are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Interesting idea and very insightful analysis.
Todor Kostov's avatar
@burrow Thanks, Jon! Always trying to help!
Great article! Very good insights! Thanks!
Todor Kostov's avatar
@sarafova Thanks, Maria! Appreciate your prompt feedback!
Mark Maddock's avatar
Excellent and comprehensive report.
Todor Kostov's avatar
@skipper Thanks for your feedback Mark! Glad it's helpful!
Conor Mac's avatar
I recall checking this company out a few years ago, and thinking that it was pretty reasonably priced, but I wasn't as comfortable with their focus on derivative products in the UK. Nonetheless still a fascinating business. Thanks for providing this refresher, really insightful :)
Todor Kostov's avatar
@investmenttalk Thanks for the feedback, Conor! I think it is a well run company with significant vested interests from the management and by factoring the potential with the non-leveraged business could easily unlock significant shareholders value within the next 1-2 years (on top of c. 50% usual dividend payouts).
Brilliant analysis, Todor.
Todor Kostov's avatar
@agrevtseva Thanks, Anna! Glad you are finding it useful!
Great read! Thanks for the article.
Todor Kostov's avatar
@uraser Thanks, Yulian! Hope it is helpful!
Ritz Punj's avatar
Wonderful writeup and insightful
Todor Kostov's avatar
@ritzpunj Thanks, Ritz! I am glad that you are finding it useful!
Very good article, thanks for the insight
Todor Kostov's avatar
@mayank_goel Thanks for your feedback, Mayank!
Picking individual stocks is notoriously difficult. This research is very helpful. Thanks Todor!
Todor Kostov's avatar
@amitsaini Thanks, Amit! Investing is not easy and not for everyone! You always have to be well prepared to succeed long-term.
Very impressive Todor. Thanks for sharing your analysis
Todor Kostov's avatar
@samajpathi Thank you, Pinky! I am glad the the analysis has been useful to you!
Brilliant analysis! Thanks for sharing!
Todor Kostov's avatar
@gkg Thanks for your feedback, Gabriela!
Great analysis. Looking forward to seeing how this plays out.
Todor Kostov's avatar
@sanjito Thanks, Sanjay! I hope it will be a positive outcome within the next 1-2 years based on the margin of safety cushion already in place.
A great article , thank you for sharing it!
Todor Kostov's avatar
@amy_123 Thanks, Amy! Good luck with your investments!
Great article. Very helpful 👍
Todor Kostov's avatar
@dinardino Thanks, Dino! Appriciate your feedback!
Ankur Sharma's avatar
Very insightful information. Thanks for sharing this..
Todor Kostov's avatar
@ankur20584 Thanks, Ankur! Really appreciate your feedback!
Great insights
Todor Kostov's avatar
@navidkhaliq Thanks, Nav! Thanks for your feedback!
Adam Stott-Everett's avatar
Some great analysis and insights. Thanks for posting.
Todor Kostov's avatar
@adamskistotty Thanks, Adam! Really appreciate your feedback!
Abrasax Games's avatar
Excellent work
Todor Kostov's avatar
@kostas_galiatsatos Thanks, Abrasax Games!
Very useful information. Thank you for sharing it.
Todor Kostov's avatar
@crm Thanks, MC! Pleasure is mine!
Thanks for sharing! That’s look amazing!
Todor Kostov's avatar
@natman Thanks, Nat!
Impressive analysis on a very interesting company. Thanks for sharing!
Todor Kostov's avatar
@socratesgia Thanks, Socrates. I hope you find it really useful.
Teddy Menmuir's avatar
Strong stuff here!!!
Todor Kostov's avatar
@kakahappens Thanks, pal! Always happy to help!
Conor's avatar
Outstanding analysis, Todor! Great entry point at curernt market price.
Todor Kostov's avatar
@conorvalue Thanks, Conor! With good execution the company has a great future potential once value is unlocked.

Author

Related