Small Cap Value Report (Thur 7 June 2018) - Mello South, RFX, VLTY, CMCX, PLUS, INL

Thursday, Jun 07 2018 by

Good morning all,

Time for a quick public service announcement.

David has informed me that there are still a few tickets remaining for the Mello South conference which is taking place exactly one week from today (on Thursday, 14th June) in Hever, Kent.

Among the speakers will be Leon Boros, David Stredder and fund managers Mark Slater and Andy Brough. I will be there too, live-blogging the SCVR. And of course there will be a wide variety of quality companies for you to speak with.

It promises to be another hugely interesting Mello Event, this time in the south of England and for one day only. I recommend grabbing the last few tickets. Here's the link.

Ok, time for some analysis.

Today we had interesting announcements from:

Ramsdens Holdings (LON:RFX)

Veltyco (LON:VLTY)

CMC Markets (LON:CMCX)

Plus500 (LON:PLUS)

Inland Homes (LON:INL)

Ramsdens Holdings (LON:RFX)

(Formatting is broken, so I can't put the share price here - apologies.)

Great headline numbers from this diversified financial services provider, headquartered in Middlesbrough:


Foreign exchange is leading the way and profitability per customer has improved, so I'm guessing that people are using Ramsdens more frequently or for larger transactions - a great sign of customer satisfaction.

Margins in this segment have also improved (and it just goes to show how uncompetitive banks are at doing this, that a company can steal their market share so profitably.)

The number of FX customers is up 13%, but FX revenues are up 26%.

(As an aside, it might be worth noting that the vast majority - 86% - of Ramsdens' total customers are using the FX service. It's inevitably a lower-margin activity than pawnbroking and precious metal dealing.)

As with H & T (LON:HAT), the pawnbroker in which I hold shares, Ramsdens is also doing very well in jewellery. Sales in that segment are up 35% to £8 million. Up until a few years…

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

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Ramsdens Holdings PLC (Ramsdens) is a financial services provider and retailer. The Company operates through four segments: Foreign Currency Exchange, Pawnbroking, Purchases of precious metals and Jewellery Retail. The Foreign Currency Exchange segment consists of primarily, the sale and purchase of foreign currency notes with prepaid travel cards and international bank to bank payments. The Pawnbroking segment is a form of asset backed lending where an item of value is given to the pawnbroker in exchange for a cash loan. Through its precious metals buying and selling service, Ramsdens offers to buy unwanted jewelry, gold and other precious metals from customers for cash. The Company is engaged in refurbishing items bought from customers and retailing them through its store network. The Company also provides ancillary services, including franchise fees, western union, sale and buy back of electronics, and credit broking. It has a portfolio of over 130 stores. more »

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Veltyco Group plc, formerly Velox3 plc, is a marketing company. The Company is focused on gaming, binary options and lottery operations. The Company is focused on generating marketing leads and entering into marketing contracts for the activities of its partners in sports betting, casinos, poker games, lottery and binary options, such as Betsafe (online casino and sports betting), Lottopalace (lottery) and Option888 (binary options). The Website offers players the opportunity to play the lotteries, including Germany Lotto, Mega Millions, Power Ball, National Lottery and Euro Millions. By providing a lottery system, it gives access to a range of lotteries and jackpots. Option888 is an online binary option platform. Through the Betsafe brand, it offers casino, sports betting and poker games. 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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54 Comments on this Article show/hide all

clouds 7th Jun '18 35 of 54

Hi Graham,

Few points to consider on Plus500 (LON:PLUS)  (disclosure long)

With regard to risk management, the biggest recent black swan event in a major FX market was the Swiss franc de-pegging move in January 2015, which Plus500 handled very well. I think IG Group (LON:IGG) faired significantly worse from this event, seeing significant losses and also going after clients who had moved to negative account balances. See Plus500's comment here:
Vs IG:

Plus500 seem to prefer lots of small customers, who have small positions, as part of their risk management. Having high value clients who take big positions can actually be riskier, perhaps more so once ESMA bans negative client balances, if a big position moves quickly against the client and would have pushed them in to negative territory (by missing a stop), you may find the broker taking this hit instead.

It will be interesting to see the impact of ESMA on Plus500, they have previously often sounded quite positive about clarifying the regulatory environment. On this note, I wonder if the decision for them moving to main market (where they will likely join the FTSE 250 index) is related to the greater clarity on the regulatory side for Europe.

Will also be interesting to see how they grow worldwide, they have obtained various licences for other countries recently.

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Graham Neary 7th Jun '18 36 of 54

In reply to post #371264

Hi clouds, thanks for the comment - do you think Plus500 (LON:PLUS) was hedged in EURCHF? I expect that it wasn't.

There is something magical about the idea that extreme leverage by clients can be combined with no risk of them losing more than their deposit. The risk of the net client position must be sitting somewhere - if it's not with the client, and if it's not externally hedged, then it must be with Plus500 (LON:PLUS).

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Graham Neary 7th Jun '18 37 of 54

In reply to post #371244

IPX is on the list for tomorrow! Thanks.

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davidjhill 7th Jun '18 38 of 54

In reply to post #371214

Good summary on Veltyco (LON:VLTY) Graham which, I think nails the salient points. I am bullish and have a small long position as I can see it doubling in the next year or so but I also agree that a couple of things are required for that

1) market confidence that trade receivables problems were a one off and indeed fixed per mgmt. we should see that in the net cash figure which, should be materially higher by end H1

2) evidence of strong continued growth in own brands, especially Bet90

Next set of results are important

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clouds 7th Jun '18 39 of 54

In reply to post #371274

Hi Graham,

Firstly I would welcome more transparency with regard to how Plus500 (LON:PLUS) manage their risk. My guess would be that they weren't hedged in the CHF incident... however I'm not sure that's necessarily worse than being hedged.

I haven't fully worked this through so may not be correct, would appreciate input, but:
- If you were fully hedged, and you give the winners the large gains, and the losers don't pay up (fully), then you are potentially left with real losses on your hedge, as the price you've exited the hedge at is substantially worse than that which customers effectively got i.e. they get a better "price" by failing to pay their debts. My understanding is IG did have to write off significant customer debts.

- If you are not hedged, you close out losing customers without issue, but do have to pay up for the winners. Big question to understand how Plus500 faired on the day would be what the balance of customers was, and how much they had to pay out for winning customers.

I wonder if they generally just don't allow any individual instruments exposure to get very high: "The Company's proprietary risk management system ensures that overall exposures to a single instrument, such as the Swiss Franc, are unlikely to have a material impact on the Company's financial position."

I'm not sure what you're suggesting, presumably you see the impact as sitting with Plus500 (and I can see how you get to that), but if you accept that's reflected in their accounts then presumably that shows it wasn't a big issue. If you're questioning the accounts, that's a whole different game, but I would point to the very strong cash generation and large dividend payments as supporting the idea the accounts are valid.

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daveinthelakes 7th Jun '18 40 of 54


I emailed the investor relations head at Plus500 (LON:PLUS) several months back asking if they hedged and how would they deal with a black swan event. I never recieved a reply and sold out over these concerns. It has cost me dearly with the price surge but their failure to address this is a serious red flag.


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AnonymousUser252054 7th Jun '18 41 of 54

In reply to post #371274

In their risk disclosure notice Plus500 (LON:PLUS) state: " is not possible to lose more than the amount invested and customers cannot be left in debt to Plus500. Trading CFD’s is not suitable for all investors; make sure you fully understand the risks involved."  

So a user is protected to that extent. Figures bandied about for these platforms is that nearly 90% of people lose money. Would the resulting mountain of money in itself not act as a significant hedge?

Disclosure: took profits some months ago, (unfortunately).

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Aislabie 7th Jun '18 42 of 54

Intercede (LON:IGP) reported today and appears to have attracted no comment here at all. A micro cap, with a former very underwhelming management, Intercede suffered a number of nasty surprises, that were covered in Stockopedia, but with the old managers replaced, things seem to be getting onto an even keel.
Their principal cyber protection ID product appears to be gaining ground and there is some indication that Intercede's days as a serial disappointment are drawing to a close, today's 7% price gain supporting this.
They are surely not yet safe and cash will probably need to be raised before too long, but if they can go on showing tighter costs and growing revenue the future could be a lot brighter

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Paul Scott 8th Jun '18 43 of 54

In reply to post #371379

Intercede (LON:IGP) - looks interesting. Crap performance. I've had a punt on it.


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raigersfield 8th Jun '18 44 of 54

I suggest Paul actually reads the Plus annual report which sets out their hedging policy rather than publishing his alarmist speculations on the subject.

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cig 8th Jun '18 45 of 54

In reply to post #371274

Plus500 seems to "hedge" by crippling the product: sometimes they just close a side (disable trading), presumably when their book is imbalanced, e.g. it looks like that if a lot of people are say long the FTSE they only allow new short trades, until the book balances. Add size limits (no big trades) and it's pretty bullet proof. A normal broker's customers wouldn't tolerate that kind of "service", but as they concentrate on lower life forms they get away with it. The main risk is probably regulatory, or the principals doing a runner, or that copycats exhaust the addressable market.

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timarr 8th Jun '18 46 of 54

In reply to post #371409

I suggest Paul actually reads the Plus annual report which sets out their hedging policy rather than publishing his alarmist speculations on the subject.

Graham's writing the report solo this week. There's a nice big picture of him at the top of the page, looking suave and sophisticated.

Anyway, the Plus500 annual report does have a few things to say about hedging, but I think it would be pushing the boundary to suggest that this gives a comprehensive view of the policy or addresses how the regulation is pushing it to change:

The Company employs a combination of limits and internal hedging tools to ensure risk is managed by having a base of a very large number of small customers; monitoring exposure limits (by client, instrument and total exposure), with the ability to cap trades and hedge once limits are reached. Credit risk is limited by having all customers pre-fund their accounts, as well as a margin close-out policy, to minimise unfunded customer losses. In addition, Plus500 does not offer CFDs in less liquid instruments, such as small cap stocks, which also limits its risk exposures.

That doesn't really add anything to the debate. In the end there is some exposure, it's not entirely clear how tail event risk is being managed and there remains the suspicion that an extreme event might cause serious damage. And ESMA must have some impact on a high volume, low roller model.

On the other hand it's undeniable that Plus500 (LON:PLUS) has been a great investment.  Whether you want to be in it now is probably a question of risk appetite, but it's certainly not one to put in the buy and forget box hidden in the dingy recesses of the attic.


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abtan 8th Jun '18 47 of 54

In reply to post #371179

Thanks for your thoughts, much appreciated

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abtan 8th Jun '18 48 of 54

In reply to post #371184

Alliance Pharma (LON:APH)

Thanks for the research link - it was a very interesting read, especially the section on Diclectin.

I actually think Hardman should look more than 3 years out; this is a drug that will undoubtedly reach the levels of utilisation seen within Canada where it has been sold for many years (80% of pregnant women seeking medical relief end up buying it there).

Looking at it from a long term view, and being conservative vs Hardman's stated potential customers (they seem to have added 80,000 live births in their note vs ONS published 2016 UK live births) gives me a long term mature revenue of $600m/£450m per year for the UK + 9 European countries. Huge potential for growth vs £120m currently being achieved.

My only hesitancy is what % of the profits is included within the licensing agreement.

On a personal note when my missus was pregnant she was unable to obtain Diclectin in the UK, but could get it in Portugal and said it was very effective. There does not appear to be anything like it on the market

Thanks again for sharing

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Graham Neary 8th Jun '18 49 of 54

In reply to post #371354

re: Plus500 (LON:PLUS)

Hi shine,

The user is protected, yes, but my question is what about the broker?

For a hedged broker, the purpose of customer losses in excess of their deposit is to protect the broker in the event that it is not possible for the broker to exit their hedge in a timely manner, when the customer has a losing trade.

Or if we look at it at an aggregate level: if most customer trades by value are (say) net long, then the purpose of customer losses in excess of their deposit is to protect the broker in the event that the underlying asset collapses in value too quickly for an orderly exit - the broker will have had to buy that asset, to hedge the net long position.

But if the broker doesn't buy the underlying asset, then it doesn't care if the asset collapses, as it simply pockets the net losses of its customer base.

To clouds: I am not questioning the validity of the accounts. I am saying that the risks being taken to achieve its results are of a different magnitude compared to the risks taken by brokers who hedge. Plus500 (LON:PLUS) is a bucket shop.

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TheArb 8th Jun '18 50 of 54

In reply to post #371614

there is slightly more to the debate than whether a provider is 'hedged or 'unhedged'. A black swan event like the CHF revaluation in January 2015 exposed a couple of risks that were either ignored or dismissed previously . Firstly it is important to remember that leverage in currency trading is generally much higher than in equities, heck we see 40% moves weekly in equities but a move of 40% in a currency pair is very rare. Secondly many of these CFD or synthetic positions are put on with guaranteed stop loss or 'limited risk' CFDs (option traders will immediately recognise this is akin to writing deep out of the money calls or puts). So even if the provider is perfectly hedged to start with, he may have a problem with his dynamic hedging on a gap up or down. The client hits his stop loss and so is out of the position but the provider may have to take significant slippage on the hedge before he exits. My understanding is that this was very significant in the CHF move. In addition, if the client takes a loss that is greater than the equity in his account, the provider now has a credit risk problem.

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AnonymousUser252054 8th Jun '18 51 of 54

In reply to post #371614

Thanks for the reply, Graham. 

As you say, apart from the client being protected, what about 'the broker in the event that the underlying asset collapses in value too quickly for an orderly exit'?

I'm just looking back at the Swiss franc surge that has been mentioned on here. An Independent article suggests IG (who didn't protect clients from losing more than their deposit) struggled to close positions as the situation unravelled and yet surprisingly total client losses were just £18.4 m. (IG ended up £30 m down, as it was unable to close its hedging positions on bets because of the extreme volatility'.) Obviously some future event could/will be a lot more painful than this, but doesn't there come a point when Plus500 (LON:PLUS) with its cheapskate model (minimal or non-existent hedging cost) has found a way of making a mountain of cash and is using it? Having a quick look at their balance sheet on Morningstar they appear to have a quarter of a billion dollars as of end of Dec 17 (and that's before making a killing on the crypto craze earlier this year). Why hedge? 

Interestingly, it took three years but the Swiss franc seems to have settled back to where it was against the euro.

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timarr 9th Jun '18 52 of 54

In reply to post #371839

Having a quick look at their balance sheet on Morningstar they appear to have a quarter of a billion dollars as of end of Dec 17 (and that's before making a killing on the crypto craze earlier this year). Why hedge?

Because one day the model could fail catastrophically. If you invest in IG Group (LON:IGG) you can be as close to certain that you'll never suffer a total loss of capital, while investing in Plus500 (LON:PLUS) doesn't carry the same level of certainty.

If you analyse what happened around the unpegging of the Swiss franc the only real explanation for Plus500's outperformance appears to be pure luck. Technically they were running a balanced trading book - basically customers can only lose what they have in their accounts. Now even a one-eyed, half-cocked analysis would suggest that if the amount people can lose is capped and the amount winners can gain is uncapped then there's a big hole, which the company has to fill. There's no magic to this, it's just bookkeeping.

Best guess is that Plus500's long tail of mug punters simply weren't betting on the Swiss Franc before the unpegging event, so their initial exposure was tiny. IGG's clientele were a deal more experienced and wise and IGG got caught on the wrong side of a Black Swan event. But they know this will happen, that's why they hedge, although no hedge can fully protect against the completely unexpected.

I don't have any view on what will happen to Plus500 in the future, it may well continue to make significant amounts of money and deliver extraordinary gains for investors: or it may not. I am, however, reasonably sure that IGG, where I hold a decent stake, will continue to thrive and in a decade or so will have grown its market cap significantly. At the very, least future surprises won't put it out of business.

As ever, you pays your money and you takes your chance.


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justinian 9th Jun '18 53 of 54

As part of the ESMA's submissions I actually mentioned that it is ridiculous:

1. A cfd provider is allowed to bet against its clients and not hedge risk.
2. A cfd provider is allowed to set its own prices which may or may not be true market prices to which they purport to represent.
3. A cfd provider can exist outside the jurisdiction of the ESMA like Plus500. In fact, I said that all cfd providers should have separate entities for every national office (as we have done with banks in the wake of the financial crisis). Frankly, I am just as worried about regulatory capture of a Malta or Luxembourg etc. as I am for them to be run from Israel.

Given the toxic cocktail above, I would have concerns that a provider could dodge 'risk' by essentially setting their own prices for events like the Swiss Franc. Try getting your money out of a provider located in Israel for instance if the sh*t hits the fan.

In short, the regulatory changes thus far are just the beginning would be my guess. And that further changes will favour the likes of IG and per the editorial comment in the article.

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Scoobydoit 11th Jun '18 54 of 54

Graham / Paul / All

VLTY - Red flags

I have been looking into VLTY over the weekend and especially its links to a Uwe Lehnhoff, who seems to be involved in all the companies VLTY trade with. In summary I did not like what I found and have closed all positions in VLTY.

A few links and notes :

Option888 (Celestial Trading Ltd) seems to be the only client of VLTY in the On-line financial trading vertical

Option888 is one of the fastest growing binary options brands on the market today. What sets them apart from the others is their intuitive and user-friendly website, live support and personal brokers in 7 languages. Navigation within the website is easy and confirmation after setting up a trading account is received within a few minutes of its submission. There are many nice features on the binary options trading platform and a nice choice of several different binary options.

Close down of Option888 activities in Germany and Austria from 21/03/18

Public warning - Altair Ltd

Option888 Not registered in Italy 27/12/16

- the companies Altair Entertainment Nv, Payific Ltd and Capital Force Ltd are not authorised to provide investment services and business in Italy in any way, including through the website;

Uwe Lehnhoff - Related Parties


RNS - ESMA Ruling

The Company confirms that none of the operators for whom Veltyco undertakes marketing activities offer a binary option product, as such products have previously been withdrawn in anticipation of such regulatory changes.  Furthermore, the operators have confirmed to the Company that they are operating in line with the restrictions proposed by ESMA on CFD trading.

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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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