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Should You Sell Optimal Payments Plc And Buy Plus500 Ltd?

Is it time for investors to lock in some profits on Optimal Payments (LSE: OPAY)?

The payment processing company’s shares rose by 4% today, following a trading update, but I’m not sure the outlook justifies the current share price. Although the firm’s post-tax profits are expected to hit $78.6m this year, 150% higher than in 2013, I don’t expect this rate of growth to continue.

Neither does the market, despite the planned €1.1bn acquisition of European mobile payment firm Skrill. Consensus forecasts for Optimal’s 2016 profits have fallen by $26m to $70m over the last month alone.

In today’s update, Optimal confirmed that it had arranged the €578m of debt it will need to help fund the €720m cash element of the Skrill acquisition. The deal will also include 37.5m Optimal shares, giving Skrill’s private equity sellers a 7.9% stake in Optimal.

I estimate that Optimal will be left with net debt of $500-600m, or around nine times 2014 operating profits. This chunky debt will sap the firm’s cash flow and suggests that a maiden dividend remains unlikely.

It’s also worth noting that although Optimal’s profits rose strongly last year, its cash flow from operating activities fell sharply, from $100m to $47m. Optimal is also due to pay cash or issue shares to the value of $19m during the current year, as deferred payment for previous acquisitions.

I’m not convinced Skrill will add enough to Optimal’s bottom line to compensate for the rising tide of debt and cash commitments.

A surprise alternative?

The fall from grace of Plus500 (LSE: PLUS) has been rapid and brutal. The Israel-based online trading firm’s shares have fallen by 50% in one week, leaving investors puzzled and unsure.

The trigger for the falls was news that Plus500 had asked its customers to provide enhanced identification in order to comply with stricter anti-money laundering rules. In the meantime, existing customers have been left unable to open new trades or withdraw money from their accounts.

Plus500 hasn’t offered any explanation for the firm’s sudden enthusiasm for anti-money laundering procedures. It’s impossible for investors to know what, if anything, to read into this sudden change.

If underlying problems emerge, Plus500 shares could fall a lot further. But that’s a negative view for a firm that was previously operating successfully under UK financial regulation.

What if the firm has simply been told to tighten up its procedures, without any wrongdoing being found? If so, Plus500 could rebound sharply and prove a very profitable investment.

Consider the numbers. Plus500 currently trades on just 5.8 times 2015 forecast profits. Consensus forecasts suggest a dividend payment of 40.5p per share, giving a prospective yield of 10.3%.

Even if these forecast profit and dividend numbers were halved, Plus500 still wouldn’t look expensive.

I’d stress that this is a somewhat speculative situation, as we don’t know the underlying cause of the current disruption at Plus500.

Even if the firm has no underlying problems, recent events may persuade many of its customers to shift their accounts to one of Plus500’s competitors.

It’s a risky buy, but Plus500 might be worth a closer look.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.