CMC tanks amid margin pressure and trading drop

Beyond considerations over a possible break-up, shareholders in CMC Markets (CMCX) will be mulling over whether a lower client income retention rate is simply a reflection of the exceptional levels seen in FY2021. That’s the position of management at the trading platform, at least. For the year to March 2022, net operating was at the upper end of guidance, but earnings have been held in check due to increased staff costs to support strategic initiatives.

Though the group revealed “a record net operating income year when excluding the Covid-19 influenced 2021 results”, its pre-tax margin decreased by seven percentage points from the pre-pandemic rate to 32.7 per cent. Despite the big contraction in sales and operating profits, expenses increased by £3.6mn to £187.6mn.

The reduction in trading activity is perhaps best emphasised by a one-third reduction in leveraged net trading revenue as volatility levels moderated and previously housebound clients emerged from lockdown. Over time, however, the group anticipates that the initiatives underway should boost margins from 2024 onwards.

There have been some plus-points from an operational perspective. The internal launch of the group’s non-leveraged UK platform, CMC Invest, was achieved ahead of schedule and on budget and will soon be rolled out to customers. A decision to split the group’s spread-betting operations from its new non-leveraged investment products platforms is still under examination.

The non-leveraged Australian business also provides cause for optimism. It managed to grow assets under management by 16 per cent to a record A$80.2bn (£46bn) in the year, despite a parallel decline in trading activity, thanks to a step-up in B2B partnerships and the acquisition of the ANZ Bank investing business. Management believes that B2B channels offer significant growth opportunities as CMC’s product offering evolves.

Nonetheless, the group’s shares were marked down heavily on results day, and have now all but halved over the past 12 months. Even the implementation of a £30mn share buyback programme has done little to improve market sentiment.

The good news for shareholders is that we could see a further step-up in volatility rates, both here and across the Atlantic, as central banks struggle to keep a lid on inflation. Real interest rates remain in negative territory but every incremental increase reduces the attractiveness of risk assets - and may provide more trading opportunities in the process. The group’s hefty cash pile leaves it trading on an undemanding enterprise/cash profit multiple of 5.8, which we feel is a viable entry point on the balance of risks. Contrarian Buy.

Last IC view: Hold, 247p, 17 Nov 2021