Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.
Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences
Cable Car is short Plus500 with a price target of 76 pence (GBP 0.76), the stated amount of cash per share. Plus500 is an Israeli Contract for Difference (CFD) broker listed on the London Stock Exchange’s Alternative Investment Market under the symbol PLUS.
On May 18, Plus500 declined 36% due to news of a significant number of UK accounts being frozen pending customer verification to comply with anti-money laundering (AML) rules. Shares have continued to decline this week, while most discussion has focused on the narrow impact of the account freeze. According to the company’s statement, the AML review is merely a temporary procedural setback affecting a subset of accounts representing no more than 50% of revenues. If so, the market would appear to have once again overreacted to a short-term scare about the sustainability of Plus500′s business model. Alternatively, this could represent the beginning of increased regulatory scrutiny that may ultimately impair the company’s ability to continue as a going concern.
Irrespective of the effects of the AML review, Plus500 remains dramatically overvalued in my opinion. A host of red flags unrelated to the recent news leave me skeptical of the company’s claims about its business, including inconsistencies among public filings, an undisclosed subsidiary, evidence of extralegal behavior by predecessor and affiliated entities, and a material accounting discrepancy between Group and subsidiary accounts.
In my preview post on Monday, I compared the 2013 and 2014 accounts of Plus500UK, the regulated subsidiary currently undergoing additional AML review. The 2014 accounts restated 2013 revenues, reducing them 80% from GBP 63.8 to GBP 12.8 million. Plus500 has yet to explain this restatement or reclassification of revenues in a regulatory filing. That omission alone leads me to believe trading in Plus500 shares should be suspended until the company clarifies its accounts.
In a departure from previous years, the 2014 audited Group accounts were prepared prior to the audit of Plus500UK being completed. The 2014 Group audit is dated 16 March 2015, while the 2014 Plus500UK audit is dated 10 April 2015.
The turnover figures reported in the 2014 Plus500UK subsidiary accounts represent approximately 17.5% of 2014 and 17.4% of 2013 Group reported revenues, down from 86.8% in 2013 as originally reported. Not only is this level of revenue for Plus500UK inconsistent with the ca. 50% referenced in the company’s May 18 statement, but the explanation provided in response to a journalist’s inquiry is inconsistent with past disclosures regarding the proportion of revenue generated by customers domiciled in the UK (16% in 2014 and 15% in 2013) as well as the inter-company agreement governing transfer payments (see section 15.6 of the Admission Document) to the Israeli parent. The new Plus500UK revenues for 2013 can only be reconciled with the reported revenue of the Group if the amount of revenue generated outside of the regulated UK entity, prior to the Cyprus license, were substantially higher than previously reported, or there was a material change to the inter-company agreement, which has not yet been disclosed by the company. Otherwise, Group revenues for 2013 and 2014 appear to be overstated several times over.
If you read only one other post in this series, let it be Part 4, in which I discuss this and other inconsistencies among the Plus500UK subsidiary reports and the Group filings.
My aim in this series of blog posts is not to duplicate the excellent work of Dan McCrum at the Financial Times, who has written a 12-part series on Plus500 that raises a number of important questions about the company’s promotion practices, churn, and business model. I agree with much of his assessment.
In contrast to a typical short seller’s report, my purpose is also not to level allegations of wrongdoing at the company, its auditors, or management. My goal is instead to document the unanswered questions that have motivated my positioning. I have no way to verify how accurately the reported financials reflect the actual condition of the company. I have structured this report as a ten-part series of blog posts in order to discuss topics in free form and link to a variety of primary source documents from my research.
Past short arguments and journalist reports have not discussed the full background of the company or documented the full extent of the discrepancies among public filings and management statements. I am operating under the presumption that the audited financial statements fairly and accurately present the financial position of the company, while also pointing out issues I have not been able to reconcile. I welcome constructive feedback and look forward to clarifications from the company.
Plus500 advertisements contain a somewhat cheeky disclaimer reminding prospective customers that “Your Capital is at Risk.” This series of articles may perhaps serve as a reminder to shareholders and prospective investors that your capital is at risk too.
Thank you to FB and EM for feedback during the research process.