CMC Markets (CMCX) – Q3 Update
CMC Markets shocked and confused the markets with their H1 2020 figures. In October they said:
Changes made to the internal business model have resulted in the retention of a greater proportion of client income, meaning that the Group expects the CFD business net trading revenue to be approximately £22 million higher than the £63 million reported in H1 2019 at approximately £85 million.
Some interpreted this as relating directly to a lower churn of customers and/or lower acquisition costs or even lower advertising costs following the introduction of regulation for retail customers. However the slides provided in November and associated commentary made it clear that this increasing retention was mostly due to a change in hedging policy:
• Change in risk management strategy was made in FY19 following a significant deterioration in the efficacy of our hedging policy
• Hedge costs have reduced in the region of £1.0m per month vs prior year
We were then left with the obvious questions about sustainability:
- Was the low hedging losses in 2020 down to luck, or was it the FY2019 than was anomalous?
- Do the reduced hedging costs open them up to additional risk of a mismatch between client profits / losses and hedging losses / profits?
The company seem to indicate that, while there would be some volatility in the figures, that both lower hedging losses (mismatch costs) and direct hedging costs could be expected to be lower than FY 2019 going forward.
Today they report:
Net operating income continued to outperform expectations in Q3 2020. The strong performance was driven by higher retention of client income in comparison to H1 2020.
So apparently the total hedging costs have in fact improved further since H2 2020. This may be due to the new hedging strategy applying for the whole period (which it may not have done for H2 2020), or further refinements to the strategy, or indeed it could be just down to luck.
It is possible it actually reflects a hedging mismatch in the CMC’s favour, for example if customers lost £5m in the quarter but a bad hedging strategy produced gains of £5m then the percentage of client income retained would likely be over 100%, but this would most certainly not be sustainable and would lead to an urgent internal review and increased hedging costs going forward.
We may not know the details until 3rd April, but in the meantime it is clear that the company is well ahead of expectations. With H1 looking less like an anomaly, annualising the results there is starting to look like a reasonable base case (leading to, for example, 19p EPS), with the potential for more subject to Q4.
This is a risky investment, but I have an order in to buy first thing.
ACSO – Accesso – Q3 Trading Update
Another terrible update from Accesso. The failure to achieve acceptable takeover terms was probably factored in to a large extent by the market as evidenced by the poor share price performance, but today’s news of poor trading and further write-downs may not have been.