CMC Markets dragged down by costs

The general choppiness of the markets proved to be a mixture of blessing and curse for CMC Markets (CMCX) during the first half. On the one hand, client retention stayed well above 80 per cent as traders and investors kept funds in play, if not perhaps invested, and waited instead for a turn in fortunes.

The problem with CMC’s performance from the market’s perspective was evidence that significant margin pressure continued unabated, particularly due to rising investment costs in pursuit of a 30 per cent rise in net operating income over the next three years. Investors, it seems, were not convinced that the progress made so far justifies the cost, and the shares were marked down by over 9 per cent on the day.

As that implies, overall margin performance was mixed. Operating expenses, excluding variable pay, were £106mn (£89mn), compared with £83mn last time, with the year-end target set at £215mn. That knocked 4.6 percentage points from profit margins, which ended the half at 23.8 per cent. The costs represent the company’s investment in new operations in Canada, as well as building a broader investment platform business in the UK. The market also noted lower assets under management of £506mn and 7 per cent fewer active trading clients at 50,199.

CMC will have few difficulties funding its diversification drive from its existing capital resources – the balance sheet shows more than £250mn of available liquidity. It may suffer from unstable forex rates and unforeseen higher costs, but a forward price/earnings ratio based on Numis’s forecasts for 2023 of 12, falling to nine in 2024, means the shares have a definite value attraction. Speculative buy.  

Last IC View: Buy, 262p, 9 Jun 2022