Small Cap Value Report (6 Dec 2016) - FCA action, GTLY, SIXH, IOM, OTB

Tuesday, Dec 06 2016 by

 FCA Action

FCA proposes stricter rules for CFD products

This news may affect you if use leveraged trading products. The proposals include new disclosures, risk warnings and leverage reductions for retail clients, depending on their trading experience.

Shares in related companies are all currently down by more than 25%: IG Group (LON:IGG), CMC Markets (LON:CMCX), Plus500 (LON:PLUS).

One thing I'd note is that IG has some international diversification, earning 45% of operating profit from offices outside the UK last year. But I suppose there are no guarantees that other regulators won't decide to take similar actions in the future!

The FCA remarks that 82% of client accounts, in a representative sample, lost money on these products. While I'm certain that the vast majority of those clients did not intend to lose money, it would be really interesting to know how many of them are using CFDs for legitimate risk management purposes: to hedge the risk of their physical stock portfolio, or a large foreign exchange transaction they are about to make.

My simple point is that there are ways to judge client satisfaction, other than by how many of us are profitable!

Gateley Holdings (LON:GTLY)

Share price: 118p (+5.8%)
No. shares: 106.8m
Market cap: £126m

Half Year Results for the six months ended 31 October 2016

This is a commercial law firm, making it one of those few businesses on the stock market which would normally use the partnership model (instead of having external shareholders).

While all businesses are reliant to a greater or lesser extent on their employees, businesses like this are completely reliant on their staff. That makes them somewhat risky territory for external shareholders!

To lessen the risks, I look for the following two key elements:

  • A respected company name which has been around for a long time (Gateley has this).
  • A track record of treating external shareholders well.

Gateley has only been listed for about 18 months, but it has at least paid two dividends during that time. Today, with strong results, it announces a substantial dividend increase:


Trading is described as "robust", with the company "on track to deliver against expectations…

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All my own views. I am not regulated by the FSA. No advice.

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IG Group Holdings plc is a United Kingdom-based company, which is engaged in online trading. The Company provides contracts for difference (CFDs) in over 17 countries globally. The Company's segments include UK, Australia, Europe and Rest of World. The UK segment consists of its operations in the United Kingdom and Ireland, and derives its revenue from financial spread bets, CFDs, binary options and execution only stockbroking. The Australian segment derives its revenue from CFDs and binary options. The Europe segment consists of its operations in France, Germany, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden and Switzerland, and derives its revenue from CFDs, binary options and execution only stockbroking. The Rest of World segment consists of its operations in Japan, South Africa, Singapore, the United States, the United Arab Emirates and Dubai, and derives revenue from the operation of a regulated futures and options exchange, as well as CFDs and binary options. more »

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CMC Markets plc is a holding company. The Company is a provider of online and mobile trading servicing both retail and institutional clients. The Company enables clients to trade over 10,000 financial instruments, including indices, commodities, foreign exchange (FX) and equities through its trading platform. It operates through three segments: UK and Ireland (UK & IE), Europe, and Australia, New Zealand and Singapore (APAC) and Canada. Clients can trade the markets via contracts for difference (CFDs), financial spread bets (UK and Ireland segment only) and binaries. With the Company's spread bet, a client bets a specific stake size per point movement of a product, rather than trading a specific number of shares or units. The Company offers four types of binaries: Ladder, One Touch, Up/Down and Range. It also offers Australian wholesale and retail clients the ability to buy and sell Australian Securities Exchange (ASX) and SSX (formerly APX) listed products and managed funds. more »

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Plus500 Ltd is an Israel-based company that develops and operates an online trading platform for individual customers to trade contracts for difference (CFDs). Its online trading platform allows its customers to trade CFDs on over more than 2,200 different underlying global financial instruments comprising equities, indices, commodities, options, exchange-traded funds (ETFs), crypto currencies and foreign exchange. The Company enables individual customers to trade CFDs in more than 50 countries. The trading platform is accessible from various operating systems, such as Windows, iOS, Android, and Surface, as well as Web browsers. more »

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59 Comments on this Article show/hide all

Gooner_180 7th Dec '16 40 of 59

Those figures were for PLUS' international domain (.com) it's UK site is as follows:

(Much higher organic traffic, much lower referrals)


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gus 1065 7th Dec '16 41 of 59

In reply to post #161402

Hi Graham,

I think the quid pro quo of treating CFDs/spread betting as being outside of the stamp duty ambit is that it is also outside of the CGT regime too - it's a gamble on a financial instrument price movement rather than a trade in the underlying instrument.

If 85% of financial bets are losers (and the implication seems to be that many investor stakes are completely wiped out), then the spread betting tax exemption is presumably a winner for HMR&C on the grounds that none of the losing bets qualify for offset against CGT gains made elsewhere. In addition, there is also (hopefully) net corporation tax to be made from the profits the spread betting companies are making (or at least the ones that are UK resident and pay tax). Net/net, I think the UK Treasury does quite nicely thank you very much from the existing arrangements. Perhaps a classic case of "do the right thing, ..... But not just yet".



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ExpectingValue 7th Dec '16 42 of 59

In reply to post #161420

Great comment; hadn't thought of it like that.

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Graham Fraser 7th Dec '16 43 of 59

In reply to post #161420

Hi Gus,
Yes, I see the logic,and of course a whole new export industry has been created. Though I think it will all end in tears and bring the capital markets into even more disrepute.

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doublelutz 7th Dec '16 44 of 59

50:1 leverage is more than enough for shares in my opinion but much higher is used on forex where you would normally be looking to pick up very tiny movements in price dealing multiple times per day. Yes, I know about the Swiss franc - lost about £20K that day! Certainly no one should be encouraged to trade on the basis that there are easy profits to be made but look at all the online poker and other gambling sites. Far more risky that CFD's.

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Wimbledonsprinter 7th Dec '16 45 of 59

In reply to post #161405

It is interesting that Plus500's "average user acquisition cost" is $1,320 - I don't know if other firms release this figure. (I am not aware that it is not broken down what is paid back to the client, e.g. Bonuses, free bets and what is paid awayto 3rd parties.).

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ExpectingValue 7th Dec '16 46 of 59

In reply to post #161444

I daresay online poker is significantly safer than CFD trading... at least all the poker players know that they're gambling!

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doublelutz 7th Dec '16 47 of 59

In reply to post #161450

Well on trading forex a monkey sticking a pin in would break even except that the spread would eventually eat away his capital. So on that basis he would lose his money less quickly than gambling!

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Gooner_180 7th Dec '16 48 of 59

In reply to post #161447

Yeah, that's a good point to mention. I've read lots of negative comments about how high the acquisition cost is, but I doubt most fully understand CAC (customer acquisition costs). Personally, I have experience in building a user base for a tech startup, and for managing acquisition costs.

There isn't a standard system for monitoring CAC, it's usually own to the discretion of the marketers/management. Theoretically, everything that goes into marketing (including wages) should be factored into this figure.

I.e, you spend £100,000 on marketing and acquire 50,000 customers, your CAC would be £2 etc. I'd imagine bonuses wouldn't be factored in, as they would be deducted (as an average) from the user's LTV (Lifetime value) or ARPU (annual) as Plus report it.

Money paid to 3rd parties is difficult to factor in, I couldn't say how they do that. It could easily be included in the acquisition cost under their affiliate programme.


It isn't fair to say "PLUS spends £1,300 buying each customer who they fleece", as all tech/online businesses have to spend to acquire users, the key is reducing that figure and extending their value.

Costs considered would be PPC, Display Ads, CRM/Marketing Automation/Email system, Data Analytics etc. PLUS have a sophisticated marketing team, and make full use of industry leading software which isn't cheap, especially when you get 2m odd sessions per month.

The reason other companies won't mention it is probably because it is a metric that Tech companies/start-ups/ecommerce sites use, not financial services companies. PLUS being younger, and Israeli (a tech hotspot) company, means this is quite natural. But IG being founded in the (80s?) means it's not necessarily a metric that has as much importance. (the older system/metric being ROI).

Considering I have personally managed PPC accounts that bid AGAINST IG Group, I can say they spend a lot on marketing. There is no way the company/s that I have worked for can afford to match, so it's not surprising that PLUS have to spend big to get attention, which is increasingly difficult in 2016 anyway.

I think I read a few months ago that IG's target CPA (Cost per acquisition) is between £800-1000, which if so is lower than PLUS but might include different costs.

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seadoc 7th Dec '16 49 of 59

In reply to post #161393


600 (LON:SIXH) I have watched and held for some time too. Topped up today. Not for widows or orphans but I think there is a strategy but one that is financial rather than industrial. Six years ago I found this:

For every 10p you put in the company you get 230p of pension. If, or perhaps when, interest rates soar this could prove a good investment and I believe that it is for reason that Paul Dupee has supported, nurtured and become chairman of the company.

I agree with Graham and also see a potential, one not reflected in the basic numbers, the PE is 2.5 on fundamentals!



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rkells 7th Dec '16 50 of 59

Re Iomart
As you say - good numbers. I do think that there is the potential for further growth and the possibility that consolidation within this business sector could see the company being taken out by one of the larger players

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dewigo 7th Dec '16 51 of 59

Hi Graham
I go to "Share Prophets" daily. You invite requests for you to look at earlier today. I recently sold my largest holding "888" at a substantial profit. Is there another "entry level"? Also could you look at "Tarsus" where I'm showing substantial profits but they announced recently that £ weakness v $US would affect next year's profit, yet they had no problem raising institutional funds for an aquisition. The Chairman, Neville Busch built "Blenheim" in the same sector. I hope you find time to have a look. I was the biggest purchaser of "Interquest" yesterday. Surely, Jim Mellon is not wrong on this one. Over 5% now.
Best Regards

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danielbird193 9th Jan '17 52 of 59

In reply to post #161285

Just looking back over this as I'm considering purchasing some Gateley Holdings (LON:GTLY). I'm looking over the admission document and remuneration report in the first set of annual results, and I don't see anything particularly untoward in the way the directors are remunerated.

The CEO and the COO both hold a large proportion of the share capital, but that is because the business used to be an LLP (all of the former partners would have received similar awards when the LLP became a PLC). There is a share option scheme which locks in senior staff for 3 years, and only pays out if the share price rises by 5% per annum over those 3 years. And none of the Exec Directors receive employer pension contributions, which is often the area where companies hand out mega bucks to directors. Overall I think it's a pretty decent remuneration structure from a shareholder point of view.

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tomstone80 25th Jan '17 53 of 59

I believe PLUS's marketing machine has proved itself over and over again. They seem to be able to control the eCPA / ARPU model very well even when venturing outside the core user groups.

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seadoc 29th Jan '17 54 of 59

In reply to post #161393


Old post I know but fascinated by 25% rise on Friday's late afternoon RNS from 600 (LON:SIXH). Any thoughts?

Greetings from NZ, Seadoc

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bobo 29th Jan '17 55 of 59

In reply to post #169219

Interesting. I don't know who these new guys are or why they want the company. Maybe the enterprise value has got them interested??

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Housemartin2 29th Jan '17 56 of 59

Re SIXH. they say they have no present intention to acquire (oh yea ?) . If that is the case what would be the reasoning do you think ?

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gus 1065 29th Jan '17 57 of 59

In reply to post #169219

Joining the dots.

RNS Friday saying that the Chairman of 600 (LON:SIXH) has undertaken to sell at a premium his 24% holding in the company to private equity firm Disruptive Capital. Intimation DC have no intention at this time to bid for the whole company. DC specialise in turnarounds of early/mid life high growth, undervalued companies. Market cap of 600 (LON:SIXH) c.£13m with EV of about £27m. DC website says target investments c.$5-75m, so the initial investment is quite small and a bid for the whole would be manageable. Relatively thinly traded stock and quite small free float so no surprise the news boosted the share price.

For existing shareholders, opportunity is either DC inspired turnaround ( they appear to have a decent track record) or possible full premium acquisition at some point. Downside is the offer falls through/ fails to meet conditions alluded to in the RNS and/or if it happens DC and the existing executive management of 600 (LON:SIXH) fail to gel. Balance of probabilities? Decent upside potential from here.

All pure speculation. No position held.



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gus 1065 30th Jan '17 58 of 59

Rider to above comment on 600 (LON:SIXH) . Interesting post today from Simon Cawkwell's (aka Evil Knievel) blog commenting on, inter alia, the apparent £35 m pension surplus as of December 2016 (in the context of a £13m market cap) as well as additional thoughts on Friday's RNS. Link attached:-


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seadoc 30th Jan '17 59 of 59

In reply to post #169378

Thanks Gus,

Paul Dupee (11/05/43) through Haddeo, got most of the shares in placings, over 6m at a placing in 2012 at 7.5p and rather more soon after the partnership was set up in March 2010:

The partnership included partners in Florida, Luxemburg and Panama. Clausing was a hobby lathe company in USA, with an interesting history:

and I seem to remember that at the time this was relevant to the support given to 600 (LON:SIXH) and the move into the US through takeover of Clausing.

Thanks for link to Simon Cawkwell, you have found one buyer! I think this could be a huge play on the pension, in surplus, indeed only reason P/E was 2.5 was the interest on the excess on the pension. Clearly as rates rise that would all go to bottom line, hence my top up in Dec and I can see why it would be of interest to DC. Alternatively this is a play on Trumping high taxes on imported machine tools from PRC in US. Why are Haddeo getting out? Perhaps this is retirement of Paul Dupee? definitely one to watch,

Regards, Seadoc

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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