Plus500 and AA

Tuesday, February 12, 2019 - 09:50

“The FTSE 100 extends yesterday’s gains and at 7,153 is only 24 points away from hitting the year-to-date high (7,177 on 5 February, based on closing prices). Miners, tobacco stocks, banks and healthcare firms help to drive up the index. “Sterling is flat at $1.287 ahead of Theresa May’s update to MPs about her Brexit negotiations. “Overseas, European markets are in good health including a 1.2% gain from Germany’s DAX index. And in Japan, the Nikkei 225 index jumped 2.6%,” says Russ Mould, Investment Director at AJ Bell.

Plus500

“If it looks too good to be true, it probably is. That is certainly the moral of the story with Plus500 which has issued a major profit warning because of tighter European regulation around the types of trading instruments it markets to retail investors.

“Plus500 has looked like an anomaly for some time. While its peer group have all had to downgrade earnings expectations because of tighter rules on contracts-for-difference – a high-risk way of betting on stocks, currencies, commodities and cryptocurrencies – Plus500 delivered a series of statements that kept saying it would beat earnings forecasts. Its run of good luck has come to an abrupt halt.

“The new rules have put limits on how much money retail investors can borrow from their trading providers and there are tougher marketing rules around these products. As such, it seemed inevitable that Plus500 and the rest of its industry would find life a lot tougher.

“The tougher backdrop didn’t stop investors bidding up Plus500’s shares, perhaps sucked in by the euphoria around its bullish trading statements.

“Prior to today’s share price collapse, Plus500 had delivered significant gains for shareholders including 82% total return in 2018 (share price appreciation and dividends) and 159% total return in 2017.

“Owning Plus500 shares has effectively equated to taking a double dose of risk. Firstly, you’ve had the risk of your money being in the stock market. Secondly, your money has gone into a business which operates in high-risk products.

“In good times, investors will have sought superior returns. But in bad times, like now, investors will have to sadly stomach chunky losses. It provides a stark reminder for investors to know exactly what they are getting themselves into.”

AA

“There are several points to like in the latest trading update from roadside assistance provider AA. For one thing there is no mention of the weather – something which was used as an excuse for extremely weak trading in the first half.

“Earnings are in line with previous guidance and even slightly better than the consensus forecast. However, this very much looks like a case of better than feared than a business in rude health.

“Paid personal memberships ticked down in the period and investors may want to wait and see if a pledge to stabilise memberships in the current financial year and grow them thereafter can truly be delivered.

“Retention levels dipped, though only very modestly, while more positively the company managed to eke out slightly more on average from its members.

“Prior to these results, it secured a new five-year contract with Lloyds to provide roadside assistance to the bank’s customers with eligible accounts, and the company has secured a number of agreements in the business-to-business space in the last year.

“The insurance side did a bit better than expected but this is a competitive marketplace and one which faces a threat from tighter regulation, with the FCA recently announcing plans to address product quality and value.

“Cash generation remains robust but a lot of this is directed to servicing more than £2.5bn of net debt.

“AA is a salutary reminder of why many investors are wary of stock market IPOs which involve a business exiting private equity ownership, many of which are saddled with significant borrowings. At 91.4p, AA’s shares currently languish at a significant discount to its flotation price of 250p.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.