Plus500 Ltd Insists Its Business Model Is Sustainable

Troubled contracts for difference trading platform Plus500 (LSE: PLUS) has released an upbeat trading update today, ahead of the company’s AGM. 

The company announced that it had generated revenues of $108m year-to-date, ahead of the whole of the first half of 2014. Also, the group noted that it has around $92m of cash at present. 

However, the company revealed that revenues from its UK business have been “significantly impacted by recent events,” following the suspension of some client accounts. 

Plus has come under scrutiny from regulators for its lax money laundering controls. As a result, the company has recently decided to freeze a large number of client accounts while it conducts certain enhanced client on-boarding and Anti-Money Laundering (AML) processes”.

According to today’s update, Plus now has 40 staff working on the process of client remediation. The company is re-approving existing customers’ documentation, and management believes that it will take the company another month to work through all the data.

Overall, it is believed that the current client account freeze has cost the group approximately £4m in revenue.

Business sustainable 

Alongside its trading update, Plus took the unusual step of trying to reassure investors that the group has “a sustainable business model”. 

In particular, management made reference to a number of comments in the press and blog commentary, which called into question the sustainability of the company’s operating structure:

“The Board is aware of recent press and blog commentary regarding Plus500’s accounting policies and business model and rejects the assertions made as misrepresentative and baseless.”

Doubts remain 

Today’s trading update has gone some way to reassuring Plus’ shareholders that the company is on the road to recovery, but doubts remain. 

Analysts are concerned about Plus’ high level of customer churn. For example, a key statistic that analysts are concerned about is the fact that Plus only managed to retain 35% of the 86,000 people who made a trade with the company during 2013. 

Moreover, Plus’ cost of acquiring each user doubled to $1,120 during the fourth quarter of last year, compared to $542 for the year-ago period. Average revenue per user only increased by 30%, from $1,011 to $1,315 over the same period.

Moving forward 

Plus has become a classic story stock. Some investors trust the company’s management and believe that the business is sustainable, while others continue to speculate that the company is heading for the rocks. 

Only time will tell which camp is correct. However, the company seems to have won the support of UK-based hedge fund manager Odey Asset Management. 

According to a news release issued yesterday, Odey has increased its holding in the troubled CFD provider to 19% over the past few weeks. Odey is now Plus’ largest shareholder. 

And Odey stands to make a hefty profit if Plus’ valuation returns to normal levels.

At present, the company is trading at a forward P/E of only 4.3. Plus is expected to support a dividend yield of 13.9% this year. 

The bottom line

All in all, investors need to ask themselves if they trust the statements for Plus’ management.

If the answers yes, then the company could be a great value play at present levels. If not, then it might be wise to stay away.

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Rupert Hargreaves 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.