CMC Markets Plc (LON:CMCX) shares have been downgraded by Peel Hunt even though the contracts-for-difference (CFD) provider looks on track to increase profits to more than double the level expected at the start of the year.
Analysts at the broker lifted their profit before tax forecast for the current year by 31% to £56.7mln, which they said was more than double the level expected at the start of the year.
READ: CMC Markets improves client retention to boost income
But the broker’s recommendation was cut to ‘add’ from ‘buy’ even though the analysts upped their share price target to 180p from 150p.
They said the downgrade was because the “stock now looks more reasonably valued”, even though this is based on “conservative forecasts” for the next financial year that revenue will decline 7% to £189mln and PBT will fall 30% to £39.5mln as less client income is retained and new regulations in Australia weigh.
Peel Hunt’s changes followed a third quarter update from CMC last month that revealed net operating income “continued to outperform expectations” as stronger client retention and higher revenue per client offset lower client income from the softer market conditions in much of the quarter.
CMC said its fourth quarter had “started well” and was therefore on track to generate net operating income for the full year above £189mln.
Peel Hunt said its forecasts for the coming year are “a balance between several key components”, with CMC retaining more income predominantly through lower hedging costs, and that operating costs are being tightly controlled.
The analysts said their forecasts, and the wider consensus, for the next year assume a material reduction in profitability compared to FY20 as client income retention falls back towards “normalised” levels.
“We also start with a conservative assumption about the impact of the new regulations in Australia. However, the timing of this is uncertain and further delays would moderate any change to revenues.”