Good morning!

CMC Markets (LON:CMCX)

  • Share price: 163.75p (+6%)
  • No. of shares: 288 million
  • Market cap: £472 million

Pre-close Trading Update

This stock is of particular interest to me because I follow the sector, and currently have a long position in IG Group (LON:IGG).

This sounds good:

Profitability in H1 2018 is significantly higher than the same period in 2017 with both net operating income and revenue per client higher (and marginally higher than H2 2017), driven by increased client volumes.

Interestingly, the statement says there has been a small decline in active clients and that therefore, the improved financial performance helps to prove that CMC is focusing on higher-value, experienced clients.

This would be essentially the same as the IG strategy for the past several years. IG has had no interest in increasing active clients in the UK, instead only wanting to find and keep the most profitable ones.

It was a sound strategy but then it became very relevant when the FSA last December threatened to put leverage caps on retail traders in leveraged products. Along with other regulations, these rules would have had a particular focus on restricting how these firms are allowed to cater to inexperienced clients.

The regulatory threat smashed the share prices of all the stocks in the sector, although they have been recovering since then. CMC is up more than 50% from the low of 95p.

The threat hasn't gone away, but the FSA is certainly taking its time to figure out what to do next. It received more than 2,500 submissions in relation to the proposals, and has doubtless been wading through them.

On this subject, CMC says:

Regulation remains a key focus for the firm, and despite profitability in H1 2018 being significantly higher than the same period in 2017, the firm remains cautious about the future outlook given the ongoing regulatory uncertainty and the impact, if any, potential changes could have on Group performance.

I'm happy continuing to hold IG, which has the best international diversification and which I think would experience a strong boost to its competitive position in the UK from the new rules. I'm not sure if CMC would experience any competitive boost.

But CMC shares remain pretty decent value, still on a discount to compensate for this issue:

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