CMC struggles with lower transaction numbers

The relatively calm markets of the past few months proved to be a problem for trading platform CMC Markets (CMCX) as many of its clients decided to wait out the lack of volatility and keep their positions in cash. Consequently, fewer trading transactions and an exodus of customers combined to send reported profits tumbling, at a time when CMC also continued to invest heavily in its trading products. The dividend, which has always been volatile, was also cut in these results.

Yet there was a notable split in the business, with institutional volumes holding up and higher interest rates feeding through into increased interest income of £13.9mn, compared with just £0.8mn in 2022. Although client retention fell by three percentage points to 77 per cent, the changing mix of traded positions meant that overall trading revenue was largely flat at £288mn. Investing net revenue was hardest hit by higher interest rates as clients held back cash and reduced their activity – net revenue here was 21 per cent lower at £37.9mn.

CMC’s management was sanguine about the year’s lack of sparkle. “The results came in towards the top of the guidance we had already given,” said chief financial officer Euan Marshall. He said the company remains committed to investing in its products, which is reflected in its high costs for the year. CMC reckons that its investment will begin to pay off in 2025 as the costs of trading and transactions fall. CMC said it has the geographic spread it wants to be able to grow the business in new markets, but that the emphasis now with its investment plan is on product development.  

Meanwhile, the company said that the first two months of its 2023-24 financial year have been notably slow, with trading volumes falling by 15-20 per cent, a lack of volatility cited as the main reason for this. Broker Numis kept its forecasts largely unchanged, but expects to upgrade its cost estimate for the year ahead. CMC shares currently trade at eight times the broker’s earnings per share forecasts for 2024 of 20p a share. The shares have performed erratically over the past 12 months and reflect the state of the markets. With uncertainty set to continue for the remainder of the year, and margin expansion seemingly delayed, we downgrade. Hold.

Last IC view: Buy, 242p, 16 Nov 2022