CMC Markets PLC (LON: CMCX): Delivering record profits and offering attractive dividend for the shareholders’

CMC Markets PLC is an FTSE 250 Index listed financial services company based out of the United Kingdom. It provides mobile trading and online trading services for institutional and retail clients. The Company was founded in 1989. It has its headquarter in London, the United Kingdom. Geographically, CMCX operates in Australia, the United Kingdom, and internationally. The Company has stockbroking trading platforms. It offers its clients the prospect of trading in a broad range of financial instruments through them. The clients could do spread bet using CMCX’s offerings. Furthermore, CMCX offers its clients various education opportunities through trader development programs, seminars, and webinars.

On 7 October 2021, CMCX would release its H1 FY2022 pre-close update.

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by CMCX from FY2018 to FY2021. The last dividend of FY2021, GBX 21.43 per share, would be paid on 9 September 2021 (final dividend). It had an ex-dividend date of 5 August 2021. 

The current dividend yield of CMCX at about 6.80% remains significantly above the UK 10-year bond yield at about 0.5850%. It is also higher than the dividend yield of the Investment Banking and Brokerage Services sector at about 3.70%. 

UK Financial Services Industry

The financial services sector is the driver of the UK economy. It is comprised of banks, hedge funds, asset management, and other financial services companies. The sector is the largest in London in the UK. The UK is considered a pioneer in financial technology (FinTech), as such companies in the UK are attracting considerable global investments. Banks and other financial institutions are rapidly partnering with financial technology companies to enabled tech-enabled financial products. 

Growth Prospects

• Technology and operational excellence: CMCX offers its clients uninterrupted access to financial markets. Also, it continually strives to offer an improved platform to its clients. Hence, the increased functionality of its platforms fulfils client needs, drawing more clients.
• Risk management strategy: The Company has an efficient risk management strategy. It has an in-house built risk system, which is fully integrated with the front-end trading platform. Furthermore, it automates trade execution and produces real-time pricing.
• Development of non-leveraged investment platform: The Company is taking several strategic initiatives. One of them is the development of a non-leveraged investment platform to diversify its offering. It could help in long-term business growth and value.
• Low leverage: CMCX has very low leverage in its balance sheet. Hence, it can easily raise cheap debt to fund its investments in technology platforms.

Key Risks 

• Regulatory risk: Financial sector is largely exposed to change in the government’s policy, capital requirement, and legislation. Any failure to meet the regulatory requirements could result in additional costs and penalties.
• Data risk management: The financial services industry, in general, requires significant investment to enhance the level of data risk management, potentially increasing the costs of the Company.
• Reputational risk: The industry in which CMCX operates demands a high level of integrity, with client trust being the most important aspect. Hence, the Company is vulnerable to adverse market perceptions if it fails to satisfy its responsibilities to its clients.
• Disruptive innovations: There could be the introduction of new disruptive technologies in the sector. If the Company is slow to respond to these changes, it could lead to erosion of the business.
  

Now we will analyse some key fundamental and shareholders statistics of CMC Markets PLC.

Q1 FY2022 Trading Update (released on 29 July 2021)

• CMCX in Q1 FY2022 had a decent performance. Its monthly active client numbers were up ~33% from the pre-Covid levels. It remained at similar levels as in FY2021.
• Client income retention was lower than that in FY2021. However, it was more than 80%.
• Due to higher headcount, CMCX in Q1 FY2022 had moderately higher operating costs YoY.
• There is an ongoing development of a non-leveraged investment platform.

Financial and Operational Highlights (for the year ended 31 March 2021 as of 10 June 2021)

(Source: LSE Website)

• Driven by improved CFD client income retention, CFD revenue per active client rose by 22% YoY in FY2021.
• More clients have become interested in the financial markets. Also, CMCX has an ongoing focus on high-value, sophisticated, and experienced global clients. Due to these, CFD active clients surged by 34% YoY in FY2021.
• The improved client income retention and service to more clients led to net operating income surging 63% YoY in FY2021.
• Improvement in operating income resulted in profit before tax rising 127% YoY in FY2021.
• The Company continued its investment in proprietary technology platforms to diversify the offering. 
  

Financial Ratios (H2 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 13 August 2021, at 7:05 AM GMT, CMCX’s shares were trading at GBX 406.00, at par against the previous day closing price. Stock 52-week High and Low were GBX 559.00 and GBX 282.00, respectively.

On a daily chart, the momentum indicator RSI (14-period) is trading at ~30.32 level and moving towards the oversold zone. The stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last year, CMCX’s stock has delivered a decent positive return of ~30.97%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

CMCX delivered a solid performance in Q1 FY2022, with monthly active client numbers up ~33% from the pre-Covid levels. There is an ongoing development of a non-leveraged investment platform. The management also expects a net operating income of more than £330 million for FY2022, along with long-term business growth. CMCX has almost zero leverage, with a debt/equity ratio of 0.04x, indicating financial flexibility to raise further debt, if required, at a cheaper cost. It will help CMCX to fund further investments in its platforms. The Company could benefit from its technology and operational excellence, its risk management strategy, its development of a non-leveraged investment platform, and low leverage going into FY2022. The management has great confidence for FY2022 and anticipating further progress of the Company’s service lines.

Considering the technological excellence of the Company, rising interest of clients in the financial markets, the Company’s continued investments in its platforms, the better profitability, liquidity and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “BUY” recommendation on CMC Markets Plc at the current price of GBX 406.00 (as on 13 August 2021 at 7:05 AM GMT), with lower-double digit upside potential based on 12.78x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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