Documentation

This valuation was done on the 2021-04-25

Plus500 Ltd

PLUS.LSE

- GBP
 Shares Outstanding
Business Description
Plus500 Ltd. develops and operates an online and mobile trading platform for individual customers to trade contracts for difference (CFDs). The company's online trading and mobile platform allows its customers to trade CFDs on approximately 2,500 underlying financial instruments, including equities, indices, commodities, options, exchange-traded funds, cryptocurrencies, shares, and foreign exchange in approximately 50 countries in 32 languages. Its trading platform is accessible from various operating systems, such as Windows, iOS, Android, and Surface, as well as web browsers. The company was formerly known as Investsoft Ltd. and changed its name to Plus500 Ltd. in June 2012. Plus500 Ltd. was incorporated in 2008 and is headquartered in Haifa, Israel.

Competitors

Plus500 is very different compared to its competitors. The platform is user-friendly and provides unlimited access to a demo account, providing the time and flexibility to learn about CFD trading. It has a customer centric approach with available 24/7 either via live chat, email or What’s App.

However, if we compare it to CMC Markets PLC which has a choice of two trading platforms which were created for more advanced users. These are ‘Next Generation’ trading platform and MetaTrader, providing cutting-edge technology. Plus500 is more casual, so it’s a great platform for beginner and intermediate traders.

Another comparison I would say, that CMC Markets PLC is in other industries such as offering forex broker services, with some commodities and has access to a wide range of share/forex instruments available. Plus500 has more of a focus on their CFD product range.

Although, Plus500 has made an acquisition of buying Cunningham and Cunningham Trading Systems (US commodities) for $30m so they are clearly trying to diversify away from pure CFD products.

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Looking Forward

David Zruia, Chief Executive Officer, commented: Our vision is to enable simplified, universal access to financial markets, as we start to evolve from a technology company solely focused on CFDs to a multi-asset fintech group over time. We aim to achieve this by accessing multiple growth opportunities, through organic investment in our technology and targeted M&A. Specifically, we aim to expand our CFD offering geographically, launch new trading products, introduce new financial products and deepen our engagement with customers to achieve growth in the coming years.

In addition, we will continue to invest in our business, with approximately $50m to be incrementally invested in R&D over the next three years, designated to develop new products and services, drive innovation and scale our technology, including the establishment of a new R&D centre in Israel.

Total revenue for the year was $872.5m, up 146% from the prior year (FY 2019: $354.5m), this revenue performance drove EBITDA to grow by 168% to $515.9m (FY 2019: $192.3m). Customer Churn in FY 2020 was much reduced at 30.1% (FY 2019: 64.4%) with customer loyalty remained high. Plus500 remains highly cash generative with low capital expenditure due to automation and technological advancement.

The company revenue is driven by active customers and succes in attracting new customers. The future growth is expected to be "normalised" after lockdown restrictions to be eased.

On-going concern

Plus500 recently released their annual report on 25th March 2021, mentioning the remuneration and promotions policy. The founders, Elad Even-Chen and Asaf Elimelech still have significantly higher bonuses rate compared to David Zuria (current CEO). The Sunday times quoted:

Plus500 intends to pay the special bonus to Mr Even-Chen, 34, because of his work securing “preferred technological enterprise” status for the company in Israel, which has significantly cut its tax rate and led to a $47 million tax rebate in July.

Elad Even-Chen could have connections with the Israeli government which leads to paying lower corporation tax and Plus500 currently paying 12% (note: Corporate tax rate for Plus500 the years 2017, 2018 and 2019 was 24%, 23% and 23%, respective).

One concern that got my attention is the EPS. The annual bonus for the Executive Directors such as the achievement for the performance measures and targets consist of EPS of 60% and the rest of 40% targets and performance Plus500 are not willing to disclose as the Board believes that they are commercially sensitive which I think is a yellow flag.

Regulatory Risks

Plus500 is regulated in the UK, Australia, Cyprus, New Zealand, Israel, South Africa, Singapore and the Seychelles, and it’s also available across Asia, the Middle East and the rest of the world.

The main risk depends upon the Europe regulations which can affect its product profitability. It could also affect the company’s revenue due to its price movements, foreign currency, customer credit risk and ad limitations (due to some regulations in certain countries).

In Australia, Australian Securities and Investments Commission (ASIC) announced that it is going to propose certain restrictions on sales and marketing of CFDs to retail customers. CFD regulation to be applied from 29 Mar 2021.

Dispute between board members over the bonus scheme

The Committee and the Board noted that there were a number of votes (35%) cast against the 2020 remuneration terms of Asaf Elimelech and Elad Even-Chen proposed at the February 2020 EGM.

Previous CEO, Asaf Elimelech resigned due to no-agreement to pay an annual bonus. It was stated that CFO Elad Even-Chen has the same bonus as Plus500’s CEO Asaf Elimelech which was set to get an annual bonus of $1.94 million. After Asaf Elimelech resignation, CTO took the place and the current CEO is David Zuria. Annual bonus has been lowered for the board members.

Relative Numbers

Plus500 Financials:

CMC Markets PLC Financials:

Source: gurufocus.com

From the above, Plus500 trades at a much higher price than CMC Markets PLC. Plus500's price to cash flow ratio is low due to the company's ability to generate high revenues during COVID times as more people stay at home and being perceived as risky due to regulations in the CFD markets.

The Operating Margin % is significantly high compared to it's peers because Plus500 has a software barrier to entry and includes strong market presence with a significat loyal customer base. This also signifies a huge moat.

Industry Averages (Global)

Financial Svcs. (Non-bank & Insurance)

13.24% CAGR Past Five Years
6.77% Pre-tax Operating Margin (TTM)
0.39% ROIC (TTM)
0.07 Sales to Capital Ratio
3.56% Cost of Capital
0.15 Unlevered Beta
0.79 Levered Beta
The input values I chose for the DCF
CAGR in Years 1-5
2% - 

Plus500 has a record financial growth driven by COVID-19, the growth expected to slow down for the next folowing years due to COVID-19 restrictions to be eased but also due to high regulatory risks.

I think Plus500 will still have a good financial performance of being customer-driven and solely focused on CFD's which very popular among inviduals, casual trading and being able to operate in accordance with the applicable laws.

Operating Target Margin in Year 10
41% - 

COVID-19 has had a big impact on margins due to people staying at home. This will level off though. Plus500 has deep engagement with customers and continue to invest in technology through organic investment. So I still expect to achieve high margins in the near future.

Year of Convergence
2yr - 

This is because the short term spike from COVID-19 should level off and the margins should go back to normal.

Sales to Capital Ratio
2.82 - 

Plus500 has grown very rapidly with having so much cash, Plus500 has an on-going focus on attractive shareholder returns with at least 50% of profit going back to shareholders. This is the reason why Plus500 is issuing such a large percentage of dividends as they don't need to reinvest a lot into the business to grow it.

Also, it get benefits of the change in tax rate from the Israeli statutory rate (23%) to 12%.

Probability of Failure
67% - 

The reason I've put a fairly high probability of failure is due to the high regulatory risks in certain countries. If CFD's are banned then Plus500 immediately loses all those customers.

Probability of Failure
89% - 

If the company has to stop trading immediately because over regulations then Plus500 will have to distribute their net assets to shareholders. As Plus500 possess a lot of cash they don't have to sell it at a discounted rate.

Hint: Have a play with the below inputs yourself and see how the valuation changes.

DCF Valuation

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in (millions), except per share amounts

Excel

Conclusion

I have estimated the shares to have a share price of - per share.

On the 25th Apr. 2021 they traded for - a share which gives a margin of safety of .

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