UK share tips: Plus500 Ltd

Back in November I made an investment in AIM listed Plus500 Ltd (PLUS). If you're interesting in ethical investing then I should probably warn you from the outside that this is probably one to miss. PLUS has developed and operates a bespoke platform for contract for differences (CFDs). CFDs allow retail investors to take bets on the price movements of various underlying assets.

The details of the trade are as follows:

Stock ticker: PLUS:LN

Market: UK AIM market (and soon to be upgraded to the FTSE market)

07/06/18 share price: 1,722 pence

Target sale price: 2,424 pence

Company background

I first heard about PLUS on my morning commute to work. Every day I stand in the same place on the platform and tend to see the same people daily. There were two men who used to talk "shop" every morning. They seemed to be talking about trading. Being interested in personal finance and investing I'd casually listen in. What became apparent was that these two had no idea what they were talking about. I'd hear things like:

"Yeah, I went long on oil cos I've seen it go down then a quick up every two weeks"

Naïve comments such as the one above made me wonder how I could get on the other side of these sorts of trade....hence how I found Plus500.

Investment Thesis

PLUS has had an impressive run. 2012 revenues were $56.1m and net profit was $17.1m. By 2017 year end revenues were $437.2m and net profit was $199.7m. That's an impressive growth in net profit of 63% per annum.
The business is incredibly profitable and very cheap to run. The company has virtually no capital expenditure. In fact the latest financial statements revealed a return on capital employed of 142.85%. The main spending requirements are to support the marketing machine - predominantly affiliate marketing.
The company has returned more cash back to shareholders since it first listed in 2013 than shareholder would have paid for their original shares. This isn't surprising given that of the $199.7m net profit earned in 2017 $192.1m was distributed back to shareholders in dividends. 
It's clear that Plus500 is a money printing machine. However, there are risks. The European Union regulation is clamping down on CFD trading companies. Various policies have come in to protect retail investors from over-leveraging their trades or purchasing investment tools that they don't understand. It's very clear that part of the reason why the share price appears to be depressed versus fair value is due to the risks surrounding further regulation. Currently, Plus500 appears to be doing all it can to remain compliant with incoming regulation.

Valuing the company

We estimated that 2017 owner earnings (net earnings + depreciation - maintenance capital expenditure + working capital movements) were £167m. Given that net earnings have grown at 63% per annum we have used the conservative estimate that owner earnings will grow as follows over the next few years:
2019 - 30%
2020 - 20%
2021 - 15%
2022 - 15%
2023 - 10%
2024 onwards - 3% per annum

We discounted the resulting owner earnings back to present day using a range of discount rates:
2019 - 8%
2020-2023 - 10%
2024 onwards - 12%

These assumptions result in a market capitalisation of £2.76bn. Compare this to a current market capitalisation of 1.96bn and there is the potential for a 41%.
Let me know your thoughts on my analysis. I'll follow up with another article once I've closed the position - be it good or bad news.

Please note that the above analysis represents my own thoughts and opinions. Should you be interested in investing in shares then you should seek advice from a finance professional.

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