Small Cap Value Report (22 May 2015) - PLUS, TUNG

22nd May '15 by Paul Scott

68 comments 31524 reads

Good morning. Well actually, it's not, it's been a horrible morning, as unfortunately I got caught on this one:

Plus500 (LON:PLUS)

Temporary suspension - the crazy thing is, I've never liked PLUS, and have always written negative things about it, saying how the figures looked too good to be true, or too good to be sustainable. However, in a rush of blood to the head, I decided to have a punt on it in my personal trading account a few days ago, and averaged down a few times, so that my average buy price is about 446p. This is now looking like a mistake. The shares have been temporarily suspended this morning at about 293p.

No details about the suspension are given, in terms of why, or the duration, with a statement today simply saying this;

It should be emphasised again, that my sensible, longer term stuff is what I write about in this blog, but to keep myself amused, I also do a bit of shorter term trading, of interesting & liquid shares that are moving a lot, e.g. Quindell was a share I was very active in last year, and made a terrific profit on it, being mainly short, but also sometimes long (for the rebounds).

Things have not worked out so well on PLUS. Chatting to my broker, he said that opinion on this stock is totally polarised (as it was with Quindell too). It might be worthwhile to recap on the bull and bear points;

Bear points

Israeli company, listed on AIM
Question marks over how the company has achieved such high profits & growth
Sustainability of its business model under question
Some negative reviews online from customers
High profile short sellers (e.g. Gotham City) have attacked the company
Recent freezing of some client accounts, due to inadequate paperwork, under regulatory pressure
Repuational damage from freezing client accounts

Bull points

Pays generous divis, including a large one paid a few days ago
If the accounts are real, and sustainable, then the stock is now arguably cheap
Former head of the FSA is a Non Exec
The company claims to use clever online marketing to attract losing clients, who are highly profitable for them
The company has had previous issues, which blew over fairly quickly

My opinion - it sounds like there could be more bad news to come out, but we don't really know at the moment.…

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shanklin100

22nd May '15

Hi lightningtiger

Surely the recent RNSes highlight that PLUS's procedures, at least in the UK, have been unacceptably poor, i.e very far from stringent? Back-office operations are not rocket science and this is certainly true in terms of vetting new clients.

PLUS may well now be very cheap but I have to view them as uninvestable for me, as IMHO management view providing timely, complete and accurate information to the market as some sort of optional extra, not a basic requirement. Even today's RNS contains no information on how this fiasco is impacting trading and customer recruitment. And, just because this is allegedly a confidential process, why the 4.5 month delay in advising the market?

All in all very painful for me, especially as I have been abroad all week and unable to react quickly to unfolding events. I also wonder about the NOMAD's role in all this.

Cheers, Martin

Cheers, Martin

andyfwwrench

Paul

Plus500 (LON:PLUS) It isn't just AML, the FCA are looking at customer recruitment, and for exactly the reasons you outline. Spread Bets and CFDs are sophisticated products and it is the responsibility of the service provider to vet customers and turn away those who do not understand what they are doing. They cheerfully admit that their customers are so bad they don't even need to hedge positions; if leverage is large enough just the random walk of intraday price movement will even wipe out trades heading in the right direction. Ipso facto their customers are not qualified to trade and the company has broken the rules letting them trade. If I were a Lawyer and I thought the funds were there for compensation I'd be seeking members for a class action on this basis.

AW

matmat17

AW,

Good to see someone put forward the question of 'Do I want to own a company where the fundamental business model is to (probably) illegally rip off vulnerable people'. I guess to a lot of people the answer is 'how much will I make?'

I had a look at Plus a while ago on the back of what on the face of it were fantastic numbers, thankfully, I decided the company wasn't for me. Good luck to those still holding positions.

garbetklb

Matmat

Which do you think of as the vulnerable people to be ripped off more - customers or shareholders.......

garbetkib,

Both!!

janebolacha

23rd May '15

Lightningtiger,

You write, "the short sellers will have had an effect on the reputation of the company for sure. 11.7M trades today must include the short sellers determined to drive the price further down."

This knee-jerk response to blame "the shorters" follows the pattern of companies such as Gulf Keystone Petroleum (LON:GKP), Monitise (LON:MONI), Blinkx (LON:BLNX), Quindell (LON:QPP), etc, etc, etc, where there are always some shareholders who can't bring themselves to see and accept very, very obvious management and business failings.

It is those failings and the red flags that have been signaled for months now in the FT and elsewhere that have brought down the share price of Plus500 (LON:PLUS). The reportedly serious and apparently systematic breaches of the anti-money laundering regulations is surely a major cause for concern in a company you would invest in? I'm not a lawyer but would such breaches actually constitute criminal behaviour? Would that not be relevant in your assessment of where to invest?

I think you will find that shorters (of which, btw, I am not one) need fertile ground to make money out of their (entirely legal) activities. Imo, it is the management of Plus500 (LON:PLUS) you ought to be blaming for damaging the reputation of the company and for the collapse in the share price, no-one else.

Jane

As a shareholder until yesterday, it seems to me that most/all of the accusations made against PLUS were considerably wide of the mark. This was true even of the report that PLUS was suffering delays in on-boarding (horrible term) new customers, which sounded like they were winning more new business than they could cope with... ...which seemed to me like a relatively good problem to have, when the reality seems to be far worse. I wish these reports had been more accurate!

I cannot blame the shorters for the reputational damage albeit many of their allegations were wide of the mark. IMHO, this fiasco is all down to management incompetence and seemingly, again IMHO, a desire not to update the market in an appropriate and timely manner.

I had thought the appointment of the new director on 01-Jan-15 was a big tick in the compliance box for PLUS, but perhaps the opposite was true, with deficiencies being identified and addressed accordingly, as a result if his actions. Who knows? Certainly the FCA seems to have got involved at PLUS within 8 days of his appointment.

All rather frustrating. Obviously all the above is personal opinion.

Regards, Martin

Martin,

There's another factor which is equally important in providing that fertile ground for short-sellers and that's the frequent shareholder denial of information that comes to light about the company they're invested in, a kind of blind identification with that company, a kind of herd "circle the wagons, we're under attack" mentality, a refusal to even examine the possible validity of information or allegations. Why that occurs, I really don't know, surely there ought to be a deliberate detachment from identifying with the companies one is invested in and the people running them? Yes, there are common interests but also very opposed interests and we can't assume ever that directors have shareholders' interests as their number one priority. It's shareholder psychology, I suppose, something that I now see was present in my own early approach to investing but that I've learned to recognise and deal with. Excuse my musing! Bonne journée.

Jane;

Brand

In a ponzi scheme based on poor audit, you would not expect to see a smoking gun until after it has failed, would you? I am definitely not saying Plus500 is a ponzi, but look at the few things we have known about it: it makes recruitment ultra-easy, it takes cash from those recruits, it pays out dividends, customers are obstructed from withdrawing money, it has no tangible product for the customer except a trading experience, produces very impressive accounts, has a very high revenue per customer which its competitors can't replicate, it has an unusual structure, is listed on AIM and is in an obscure location. Everyone is in a flap now, but the fundamentals have not changed since inception. I am definitely not saying Plus500 is a ponzi, but it has the signs you might expect of one.

Martin,

Maybe some/all of the accusations made against PLUS were wide of the mark.

But isn't the fundamental problem with the business this: The business model relies on clever advertising to get naive customers to sign up to their platform. They/we know the customers are naive because if they weren't they wouldn't sign up to Plus in the first place. Competitors offer a similar but enhanced service to Plus, the only logical reason why a customer is with Plus is because they are not aware of other platforms available, or not able to compare the offerings between platforms and see that other platforms are better for them.

Plus are certainly not the first, nor will they be the last company to use clever advertising techniques to get customers to buy an inferior product at a higher price. The problem is they operate in a regulated industry, where part of that regulation is to ensure that potential customers have enough understanding or expertise of the product to make informed decisions. It seems to me if Plus were following the rules they would have to reject every potential customer on the basis that they wanted to sign up to Plus in the first place!

I should add that I have never used Plus' platform and am basing my opinion around research I did a while ago, but the general consensus I found was that Plus' offering was inferior to competitors in pretty much every area.

Add to this the general appearance of shadiness from the company structure/history, and managements lack of clarity and updates to the market. It's no surprise that the shorters have gone after it. Even after the huge price drop this week it still looks to me like a very risky proposition to invest/take a punt on. I have no position either way, and will be interested to see how it unfolds.

Matt

Funderstruck

25th May '15

As is often said "do not fall in love with your shares"....divorce can be expensive!

Rusty2

26th May '15

Well rather surprisingly Plus have gone up over 20% today. I thought the shorters would be attacking today but it seems some have reduced their holdings. The sp is now around 300p, really not sure which way its going to go now. I have sold 50% and we will see, at least its better than I feared on Friday.

Mark Carter

The thing was so heavily oversold that there had to be a technical bounce at some point. Too bad it's not from the level I bought at.

Well the only ones of those I know are Quindell and Plus500. Re Quindell it was Gotham City that really had the effect of bringing the sp down, I believe, many of the things they said seem to be false, did they not lose the court case? I don't really like shorting, I don't think its right someone can sell short and then issue reports or say things to bring the sp down for their gain. I can see why its illegal in some countries. Quindell sp has recovered from 25p to 130p.

The Quindell (LON:QPP) share price was, I believe, close to 600p at the time of the Gotham City report so one could also say that the share price is still down 80% from its high point. I think that Quindell (LON:QPP) was a bomb waiting to explode, long before Gotham City ever came on the scene. Several other people were already analysing the hype being put out by the company, particularly in respect of revenue assumptions, claim success rates and accrual accounting and finding that it didn't stack up at all. Imo, there may still be even more skeletons to come out of the cupboard at QPP. Of course, these people who were doing their homework properly were rewarded by being insulted, abused and harassed by the unconditional and unthinking supporters of the then QPP management. That management has now mostly left the company, totally discredited and perhaps very fortunate not to be guests of Her Majesty in the Scrubs. So actually, Gotham mostly got it right, imo, as did people like Tom Winnifrith. As for the court case, no, it wasn't "lost", in fact the case was never heard since Gotham didn't put in an appearance, something that the then QPP management might well have been very thankful for; it would perhaps have turned out to be very embarrassing for them to be on the stand, answering under oath! As for shorting, the arguments for and against have been gone through often enough so I won't add to that.

Ramridge

Re. Plus500 (LON:PLUS) Titan's Friday analysis http://www.titanip.co.uk/987/ is a detailed balanced view on the pros and cons of investing in this company at this crucial time. Briefly the scenarios are

- it is a fraud - value zero

- based on a disaster scenario it is worth around 250p

- based on reasonable but very conservative assumptions of impact of ALM, loss of customers, etc, it is worth around 600p

The SP as I write has just crept up to 300p. So the choice is losing your shirt or doubling your money. All that appears to be missing is the roulette wheel.

There is however a risk factor that Titan has not considered in his analysis. It is clear that PLUS have had a cavalier attitude to compliance. I would bet that they didn't even have a Compliance Department. Contrast that with with some financial services companies I have worked for which have up to 100 permanent staff enforcing compliance (OK these are much larger organisations than PLUS, but the point is that they take regulatory compliance very seriously). In this scenario, FCA will probably discover other breaches. All it would take over the next few months is public knowledge of a further different breach to send this stock back spiralling down.

I therefore differ from Titan's final verdict. The risk/ reward balance is firmly against investing or taking a punt.

All IMHO, DYOR, etc.

cig

Do you think it's right someone can buy long and then issue reports or say things to bring the sp up for their gain?

Ramridge, yes, I agree with your conclusion. Another factor for me is that Plus500 (LON:PLUS) has reportedly been under investigation of some kind since January 9, that's four months ago, without the Directors feeling the need to inform the market. Looking back, I see this was rumoured by "The Times" as long ago as last September:

http://leaprate.com/2014/09/plus500-drops-8-amid-fca-investigation-on-customer-signup/

Note the comment in this article that "The Times also quotes a Plus500 spokesman as responding that the company is indeed fully compliant with money laundering rules."

None of this inspires confidence, imo.

No.

Cleeve

I bought in on friday at 202p and sold today at 299p. Its not investable as a stock as too many question marks and from here it really could go either way, I just saw it that the odds of it bouncing from 202 were substantially higher than it going further south. It has cash of around 76p so from 202 there was a maximum risk that I could see of circa 66%, and from here I think its a day traders dream stock as it will suffer from large swings in volatility so thats me done for now on this stock but I wish both sides well.

Small Cap Value Report (22 May 2015) - PLUS, TUNG

Plus500 (LON:PLUS)

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Paul Scott

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