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Categorized | Financial

Goldman’s bet on CMC Markets goes awry

Posted on November 23, 2016

The gambling known as business looks with austere disfavour on the business known as gambling, noted US satirist Ambrose Bierce.

A century later, Goldman Sachs is still betting on attitudes changing. The US investment bank held on to a 5 per cent stake in CMC Markets when it helped to float the spread betting business at 240p a share in February.

Spread betting groups are supposed to make good money from retail investors pitting their wits against foreign exchange markets and indices. IG Index, CMC’s bigger rival, seems to.

But Goldman is not having much luck with CMC. The company’s shares plunged in September after it warned that client activity had been unexpectedly subdued. On Wednesday they fell to 193p after CMC revealed half-year income had fallen even as costs rose. Revenues per punter fell 13 per cent, leading to a 29 per cent drop in pre-tax profits to £19m. The shares are now on close to 13 times 2017 earnings, a discount to the market as well as IG.

Peter Cruddas, Brexiteer, former Tory party treasurer and CMC’s founder, bemoaned the recent lack of market volatility, particularly in June over the EU referendum vote.

Gambling businesses need markets to swing up and down wildly. Sharp movements spur punters to put down big wagers and draws in the newbies needed to replace clients who stop trading to nurse their losses. But volatility, as measured by the Vix index, has flattened out this year.

CMC said if market activity does not pick up in the second half, full-year revenues may be below last year’s. That could hold back the dividend.

Mr Cruddas, who owns about 60 per cent of the shares, said gamely that he is not disappointed.

Other investors are, though. Shore Capital has consigned CMC to the investors’ “sin bin” for the moment. The odds are it will stay there a while.

Flying through flak

Thomas Cook now “walks in its customers’ flip flops”, according to chief executive Peter Fankhauser, announcing a resumption of dividends after a five-year break. His confidence is the result of a dogged performance in a lousy year for tourism, rather than a great outcome in flat conditions, writes Jonathan Guthrie. Pre-tax profits slipped only £8m to £42m thanks to currency gains on earnings that are two-thirds in euros.

It has just been one darn thing after another for the venerable holidays group. Terrorist attacks dented demand for many destinations in the year to September. This was reflected in an underlying loss of £10m at Condor, an airline that traditionally ferries Germans to Turkey.

In 2015 and 2014, Thomas Cook struggled with a critical verdict on a Greek hotel accident and the ousting of high-profile chief executive Harriet Green. She defined herself as a lion/panda, or “landa”, that roars and gives hugs. A different combination of characteristics would instead evoke a slow-moving creature that wants to rip your face off.

Most important, Thomas Cook only saved itself from collapse in 2011 and 2012 through a costly refinancing. Since then it has paid down net debt to £129m. This is comfortably covered by earnings before nasties of £512m. The token £7.7m dividend, meanwhile, compares favourably with free cash flow of £56m.

Earnings are expected to recover modestly next year, barring new terrorist impacts. So there are grounds for optimism on Thomas Cook, whose shares have plunged 28 per cent over 12 months. That leaves the stock at a one-third discount to Tui. That looks too steep, but the big Anglo-German holidays group remains tough to beat, having stolen a march on Thomas Cook in the noughties.

Proverbial wisdom dictates you should not judge a man until you have walked a mile in his shoes (or flip flops). To which Billy Connolly pertinently added: “After that, who cares? He’s a mile away and you’ve got his shoes.”

Lochaber no more

Rio Tinto is moving further from its UK roots and closer to Oz with the sale of Britain’s last aluminium smelter near Fort William. Sanjeev Gupta is paying £330m for Lochaber, which includes a 100,000 acre estate offering hunting, shooting and other leisure pursuits. Frankly, it is a low margin and largely forgotten business. The few analysts who remember Lochaber thought it all but worthless. The sale is a sliver of good news amid the gloom cast by Rio’s revelations about a $10.5m payment linked to an iron ore deal in Guinea.

Rio’s chief executive Jean-Sébastien Jacques seems sure to big up the sale at his first strategy presentation in Oz this week, as part of a cunning plan to beef up Rio’s already strong balance sheet.

But it won’t distract those who are increasingly worried about the implications of the Simandou saga — which cost two top executives their jobs last week — and its potential to paralyse staff morale.

Thomas Cook: