Shore Capital cuts CMC Markets to 'hold', says risk/reward more balanced

Shore Capital downgraded its stance on CMC Markets to 'hold' from 'buy' saying the risk/reward is now more balanced after the shares made a solid recovery from the lows seen in the immediate aftermath of the FCA consultation.

Shore, which had upgraded the stock to 'buy' back in December following what it deemed to be an overly harsh reaction to the FCA review, noted the shares are up 50% since the upgrade.

It said CMC's first year as a listed company "wasn't the smoothest of introductions", with a profit warning in September, a regulatory bombshell in December and then one of the least volatile periods in markets for the last decade.

"We think the company has emerged bruised but is adequately equipped to tackle any near term implications from the FCA’s final determination, expected any time in the next six months. The partnership with ANZ for an Australian retail stockbroking platform, announced in March, will help to offset any expected revenue fall in UK leveraged trading.

"While there is a path to a higher valuation if regulation achieves its ultimate aim of cleaning up the retail leveraged trading industry, removing what CMC CEO Peter Cruddas (correctly) describes as the ‘churn and burn’ operators, we don’t think this will happen overnight."

The brokerage lifted its fair value on the stock to 160p from 150p and said it will re-examine the investment case depending on where the shares settle after the final FCA ruling.

"We can see a path to valuation in excess of 200p in a cleaned-up industry but need to see more evidence of the shake-out before having more conviction around this view."

At 1050 BST, the shares were up down 0.8% to 150.75p.