CMC Markets Plc (LON:CMCX) shares received a boost after Morgan Stanley turned positive on the stock, citing scope for resilient UK revenues, more benign European regulation and an opportunity for market share gains.
Morgan Stanley raised its rating to ‘overweight’ from ‘equal weight’ and lifted its target price to 180p from 178p, adding that its new estimates for fiscal years 2018 to 2020 are 13% to 20% above consensus forecasts.
The bank said it expects more resilience in UK revenues given its extra disclosure around premium clients in response to the Financial Conduct Authority’s planned crackdown on the spreadbetting sector due to concerns that investors are losing money.
READ: CMC Markets reports drop in full year profit as client activity falls amid subdued markets
The FCA has proposed making firms that offer contract for difference products to display risk warnings and disclose profit-loss ratios on client accounts.
The regulator also wants to prevent providers from using any form of trading or account opening bonuses or benefits to promote CFD products.
“In-line with the factors that would make us more positive, CMC has provided additional disclosure on premium clients, with these clients now accounting for 10% of CMC's overall client base but 75% of total revenues,” said Morgan Stanley.
The bank said CMC has an opportunity to gain market share from the fallout of the new FCA rules relating to premium clients.
READ: CMC Markets expects drop in operating income amid strict new rules on spread betting
“With the proposed ban on bonuses/promotions and limits on leverage, we think most of these firms at the tail-end of the market are likely to become less attractive to retail clients.”
Morgan Stanley also noted that the final regulatory changes in Germany and France have proven to be less damaging than expected. The new rules require firms to implement negative balance protection so that clients cannot lose more than they have deposited into their accounts.
Finally, Morgan Stanley expects modest cost growth going forward after completing an IT platform upgrade in fiscal year 2015/16. It sees a 3% compound annual growth rate in costs to fiscal year 2020.
Morgan Stanley estimates a 1% increase in revenue per client will lift 2018 and 2019 earnings by 3% and 5% respectively.
Shares rose 2.37% to 149.20p in morning trading.