High-profile Partnerships With Revolut And ASB Bank Could Enhance Future Revenues, But Risks Remain

Key Takeaways

• Diversification through strategic partnerships and technological innovations is driving revenue growth and operational efficiencies, with potential for increased client trading and net margins.
  
• Expansion into new financial products and markets, especially in the Middle East, aligns with disciplined cost management for long-term profit margin sustainability.
  
• Transitioning to a B2B focus with new partnerships is risky, as it may not yield quick returns and could strain cost management and profitability.

Catalysts

Provides online retail financial services to retail, professional, stockbroking, and institutional clients in the United Kingdom, Ireland, rest of Europe, Australia, Germany, New Zealand, Singapore, Canada, and Sweden.

• CMC Markets is focusing on diversification and expansion, particularly through high-profile partnerships like those with Revolut and ASB Bank, which are expected to drive revenue growth in new regions and markets. This could significantly enhance future revenue streams by accessing new customer bases and increasing client trading activity.
  
• The successful development and implementation of technological innovations, such as their multi-asset, multi-currency platform and API connectivity, suggest potential for improved operational efficiencies and lower operating costs, which could enhance net margins over time.
  
• The expanding B2B segment, fueled by partnerships and institutional relationships, is a major growth catalyst. As these relationships grow and new ones are established, revenue per client is likely to increase, positively impacting future earnings.
  
• The group's disciplined cost management and strategic investment approach, including the optimization of the Treasury Management division, are expected to sustain robust profit margins and improve earnings over the long term.
  
• Expansion into new financial products, such as OTC and spread bet options, along with regional expansion in areas like the Middle East, offers substantial potential for revenue growth as CMC aims to meet increased client demand for these investment solutions.

CMC Markets Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CMC Markets's revenue will decrease by -3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.9% today to 19.0% in 3 years time.
• Analysts expect earnings to reach £65.4 million (and earnings per share of £0.26) by about January 2028, down from £84.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 7.4x today. This future PE is greater than the current PE for the GB Capital Markets industry at 11.6x.
• Analysts expect the number of shares outstanding to decline by 3.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

CMC Markets Future Earnings Per Share Growth

Risks

• The transition towards a B2B focus and partnerships, such as with Revolut, is still in early stages and has not yet yielded material revenue, which could limit near-term revenue growth if projections do not materialize as expected. This could impact revenue and profit margins.
  
• Heavy reliance on trading revenue, which accounts for 87% of net revenue, poses a risk if market conditions cause volatility or if there is a downturn in trading activity that could impact overall revenues.
  
• The ongoing investment in technology and partnerships, like those in new geographical markets, may require substantial funding without immediate revenue generation, potentially straining cost management and affecting net earnings.
  
• Operational costs, despite being cut by 9%, could rise again due to variables like incremental costs from new partnerships and technological integration efforts, which could compress net margins if not managed carefully.
  
• Interest income, which has been a significant component of income growth, could be negatively affected by fluctuations in global interest rates or changes in client fund levels, impacting net operating income and overall profitability.

Valuation

• The analysts have a consensus price target of £2.73 for CMC Markets based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.6, and the most bearish reporting a price target of just £1.92.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £343.7 million, earnings will come to £65.4 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.3%.
• Given the current share price of £2.24, the analyst's price target of £2.73 is 18.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.