On Thursday, 11th May, CMC Markets (OTC:CCMMF) released its full-year results. The final results were extremely positive. The full year for 2019 was up to 31st March and included increased revenues experienced in relation to increased volatility across the markets. I am bullish on CMC Markets for a growth play and smaller-cap pick in a market that I believe will perform strongly over the coming months and years.
It’s important to note that I am already long competitor IG Group (IGGHY) that takes a slightly different approach to that of CMC Markets and is more established than the latter is, having been founded 15 years earlier than CMC. CMC continue to have an increased focus on institutional clients while IG look to develop their professional client base. This position is not just a long specific to IG but also the broader market, which I believe will continue to perform and excel particularly over the near term as volatility remains prominent.
Studying the results for CMC Markets for the year, the company reported net operating income of £252 million, which was up 93% from the year prior, where revenues were just £130 million. Revenues were really low for 2019 in relation to the regulatory crunches that rippled across the market in late 2018 that maximised the amount of leverage that retail clients could use. Although revenue was very strong, the most outstanding aspect of the results was profitability. Pre-tax profits rose to £98.7 million from just £6.3 million, showing an increase of over 1400%. These results give CMC an EPS of 30p and put it at a P/E of under 10. Although this level of profitability won’t remain constant over the long term as volatility will dip and vary, it demonstrates CMC’s ability to excel along with peers under large volatility. The main driver behind this increase in profit was the acceleration of net trading revenue by 95% due to increased volatility in the last couple months of the trading year as a result of the crisis. This, in turn, drove average revenue per active client by 81%.
Source: Hargreaves Lansdown – CMC Markets 1-year graph
The company was also able to attract a strong influx of new active clients (3900), with many previously dormant accounts now becoming active again during this period. This can also serve to provide CMC Markets with a long-term benefit, as many of these new, more active clients continue to use CMC as a trading platform over the long run. The company continues to target sophisticated clients who will look to trade with CMC over the long term and not purely during volatility.
Its stockbroking segment also continued to grow strong across the year and benefited from increased volatility. Stockbroking net trading revenue more than doubled to £31.8 million for the full year. This shows CMC has continued diversification into new products and offers a strong expansion opportunity into the future. This diversification is also geographic, as the ANZ Bank white-label transaction back in 2017 made CMC the second-largest retail stockbroker in Australia.
Going forward, it’s clear to see that CMC will continue to benefit from increased volatility. This was outlined by the CEO:
The heightened volatility and trading activity resulting from COVID-19 has continued into the first quarter of the financial year, and CMC continue to provide clients with market leading trading platforms and client service. I am also confident that, once the financial world returns to more normal conditions, the Group will continue to build on the underlying growth that was being displayed prior to the pandemic. This, in combination with our stable dividend policy and positive trading outlook, will enable CMC to continue to deliver considerable value to all of our stakeholders.
Over the short term, this will allow the company to further bolster its own balance sheet and liquidity, which stood at circa £190 million at the end of the financial year. It will also allow CMC to continue to invest in its B2B platform, which is its institutional platform technology. The costs associated with this will most likely be balanced out by the continued increased volatility across the market. This will allow the company to further develop its more diverse model. While continuing to develop and improve this platform will increase costs over the short term, the company should be able to bear the fruits over the long term. It has already started to see increased activity on its B2B platform as well, as net trading revenue on the platform increased by 66% to £53 million. During this period, CMC’s stockbroking B2B platform received the most accelerated revenue growth out of all of its offerings, including its B2C platforms (retail). Revenue accelerated 130% to £26 million, and the company will look to continue to grow into the future as it continues to invest in the technology to attract new clients. The CEO outlined the importance of the B2B segment of the business going forward:
The growing contribution of B2B revenues is also particularly pleasing and will continue to be an important part of our strategy going forward.
The predominant risks regarding an investment in CMC right now would be the potential of any new regulatory crunches which have the ability to materially affect the company’s numbers. However, it has already seen the back of two material regulatory crunches in 2016 and 2018 and responded well, as increased volatility aids in fuelling growth. Another risk would be a sharp decrease in volatility for a substantial period. Though, I am doubtful this will come anytime soon, as volatility still remains prominent currently and looks set to continue into the future as the crisis continues to grip the world economy.
The market response following the release of CMC’s results was very positive, with shares up 30% on the day, closing at 259 pence. The response was definitely appropriate – CMC has excelled throughout the year and has also put forward a strong expansion plan that shows a number of opportunities that it can look to take advantage of going into the future. CMC also issued a dividend of 15 pence a share, which kick-starts a stream of more lucrative dividends for the company going forward.
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.