I have been meaning to write something on Plus500, an Israeli based provider of CFD trading, for some time. This may be the last opportunity. It is listed on AIM and was discussed at the last ShareSoc Masterclass in Peterborough, with different opinions on it from panel members. Today (1/6/2015) it has become the subject of an agreed cash offer from Playtech at 400p per share, which surely investors in the company will accept. They may be happy to get out after a roller-coaster ride of late. Note that the share price of the company has been as high as 770p in the last year, and fell as low as 280p after it became the subject of attack by bloggers and shorters, but Odey Asset Management took a large stake in response.
On financial ratios the company tended to look cheap – a low p/e of 6.5 and a yield of over 9% at the time of writing. Should you buy a company’s shares based purely on the accounts and financial metrics? Absolutely not!
The business model of the company seems to be based on a very large churn of clients, most of whom lost money it was alleged in press reports. One of the astonishing things that was revealed recently was that the company only did KYC checks (“Know Your Customer”) when they asked to take money out, not when they signed up as a customer. This dismayed many of their customers when payment was delayed. No doubt anyone who does not provide the required ID information will have the account frozen and any cash in it will subsequently be claimed by the company as “breakage”. But anyone who knows the on-line gaming sector will be aware that many clients are dubious – potentially under age using fake IDs or based in jurisdictions where such trading is not legal.
So the profits and the cash flow reported by this company might be genuine, but whether they were sustainable and whether this was a “quality” business could be another matter altogether. Certainly the company might be vulnerable to regulatory action, which Playtech are experts at handling or avoiding.
So this writer for one will not regret the departure from AIM of Plus500. It’s yet another example of how investors need to look at the business model of companies, and the management, and not just the financials or the share price performance. Something many AIM investors do not seem to have understood. But it was no doubt a fun share for speculators while the party lasted (this writer briefly held a very small holding in the shares, but I soon learned of my folly).
Roger Lawson
Paul: Thanks for correcting me on the price low, but I was being lazy and only looking at approximate end of day prices.
Roger
Just to correct an error in paragraph 1, the share price of PLUS actually got as low as 200p intraday, not 280p, after the recent attack by bears.
I totally agree with your conclusion though – it’s vital for investors to consider the longevity of reported profits. This is particularly true for companies which have recently floated – why are the existing owners happy to sell out (some or all of their holding)? Often it’s because they realise that profits are not sustainable. The seller will also know the business better than the buyer on IPO! This is why many IPOs turn out to be poor investments, yet amazingly investors still queue up to buy them!
Paul.