In my previous article on CMC Markets (OTC:CCMMF), I outlined my bullish stance on the company and its prospects with the belief that volatility would continue at high levels into the future. CMC Markets would benefit from this fuelling further reinvestment into their own platform. The company just updated the market with their Q1 results which proved that CMC’s strong performance had carried on into Q1 of 2021. Even after the share price jumping another 20% to all-time highs following the announcement, I still remain very bullish on the prospects of CMC and its expansion strategy going forward.

CMC London office... - CMC Markets Office Photo | Glassdoor.co.uk

Source: glassdoor.co.uk

Q1 results

Although the update was short, it sure was sweet. The company outlined that the business ‘continued to perform very well’. Some of the key highlights I have drawn out of the update were:

  • Client activity remaining double that of same period year
  • Client income retention materially higher than 82% of H1 2020
  • Stockbroking revenues continue to improve
  • Net operating income for Q1 2021 in excess of that reported for H1 2020

All these highlights display the strength in CMC Markets’ business performance so far in this quarter and that the trend of exceeding market expectations is set to carry on going forward. The results so far this year were so positive that the board believes that 2021 results will exceed market expectations even if normalised trading returns. The significance of that is huge. This tackles the negative consensus that a drop-off in volatility would materially affect CMC’s overall business (which I believe is highly unlikely anyway) and proves the viability of CMC as a long-term prospect even without the elevated volatility levels. It also put the Q1 results in context of the full year, where the company’s Q1 performance was strong enough to convince the board that consensus will be beaten even if the worst-case scenario was to occur.

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The new consensus for full year includes predicted net operating income of £245 million and a profit before tax of £85.2 million. This puts CMC on a forward P/E ratio of around 11. This is extremely cheap when considering the financial strength of the business and the large improvement in operating performance that has been seen over the last year. I also believe that CMC’s structure and model means that a great amount of sustainable growth can be attained over the long term. The financial structure and liquidity of the company remains robust. Although the short-term financial gain won’t be sustained at this level forever, the impact it has had in allowing the company to reinvest in its institutional technology will be long-lasting.

Although no specific numbers were given regarding the number of new active clients gained during the period, the company did highlight that their investment in technology continued to attract and retain clients. It can be inferred that this is both retail and institutional clients. The investment into the company’s B2B platform – which is a large part of their expansion strategy going forward has also benefited from increased volatility as was highlighted in my previous article. The investment in this platform will be a big catalyst for CMC Markets going forward and if they can carve out a dominant market position (which they are already building) in the institutional offerings then it can put them in good stead to obtain greater growth in the future. The growth of this platform in the 2020 financial year was large at 66%, the forecasts for this year see operating income relatively level with 2020.

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The company’s liquidity position remains strong at £189 million at the end of March. Q1 will improve this cash pile even further too give CMC Markets plenty of headroom to deal with any issues if they arise. However, for now, CMC is plain sailing and riding a wave which has been transformational for the company. To have such a great run-up in the share price of more than 200% in the recent year and yet still be priced at such an attractive valuation is surprising and proves how good and unexpected CMC’s performance has actually been. To me it seems that the market is struggling to find the right price for CMC as they exceed expectations time and time again and I don’t expect this to stop anytime soon.

CMC’s dual focus of B2B (institutional) and B2C (retail) platforms gives the company strong diversification and revenue streams. The B2B platform may give CMC a competitive advantage in comparison to that of Plus500 (OTC:PLSQF). Although I think they will struggle to knock IG Group (OTCQX:IGGHY) off their porch, they are developing leading technology with a different focus to that of IG on institutional clients so the whole business isn’t in direct opposition to them. IG currently is placing a greater focus on developing retail clients into more professional clients.

There are some risks that still need to be considered with an investment in CMC at current levels that need to be considered. A drop-off in volatility would still have a material effect on the company’s numbers although a really strong Q1 has put the company in good stead to meet their forecasts for this year anyway. The company has already seen the back of two regulatory crunches which have created two large share price falls. Although I think that we have seen the worse of these regulatory actions, any more going forward does have the potential to materially affect CMC Markets’ performance and remains one of the risk to investing in a company operating in this sector.

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Conclusion

As with IG, I am very bullish on CMC Markets. CMC offers an immense amount of value even after the huge share price run-up. To be trading at a P/E ratio of 11, when the company maintains ample liquidity and offers a strong hedge to broader market uncertainty is a bargain in my opinion. CMC is well priced in an industry that can perform well in a variety of market environments and actually sees improved performances when the economy is facing a crisis, as it has done this year.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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