2 UK stocks

Small Caps Earnings Review 14/10/2022

YouGov PLC - £865m

YouGov is a great business.

Their core activity is providing surveys for businesses & public sector entities. That, in itself is unremarkable. Sure, over time, YouGov benefits from the trust of its clients, know-how, better panel selection. Moreover, it’s easier to cite ‘YouGov’ in a presentation than ‘Random Customer Research Platform’.

But that’s a variable cost business, you can’t automate easily without decreasing the quality of your product. What I find very interesting about YouGov is their ‘Data Product’ business.

Instead of selling research the customer requests as a service, it sells proprietary YouGov data as a recurring product. For example, the YouGov brand index measures relative brand performance in real time. Essentially, YouGov garnishes customer insights about all brands in all markets, and then sells access to the data relevant to each customer individually. It’s not exactly 100% incremental margins as they obviously adapt their offering in function of the demand they see, but the operating leverage is very high as research often overlaps.

Data Products are growing faster than the rest of the group, and on top of the operating leverage, they also have a higher margin. This means that the group as a whole is seeing structural operating leverage.

Market penetration for customer insights and data products is still on-going, and YouGov is present in the majority of countries, both from a research and panel perspective. I expect their reputation to help them secure white space over smaller competitors.

This would imply a long term of trend of 8-12% organic growth, to which we could add acquisitions that create cross-selling opportunities. As data products grow faster and benefit from high drop-through, free-cashflow should grow above 15%. YouGov is also using its free cashflow to buy back shares and pay dividends, which I think will increase substantially next year as they have a stellar balance sheet.

Obviously, one could be concerned about the on-going recession and how that affects marketing spend and YouGov in the short term. Though that has been reflected in the multiple compression we have seen, the underlying business has not seen the effects as of now. YouGov is securing white-space and its geographic diversification means that as Europe slows down, Asia is picking up again in H2 22 (September FYE).

This is potentially a great opportunity to be long a compounder that has never been this cheap in the last 10 years:

Plus 500 - £1651m

Plus 500 is a “multi-asset fintech group”, which is a fancy name for a brokerage. They do mostly CFDs, but also got into futures & crypto coins. If you live in the UK, there’s a fair chance you’ve seen their ads.

Despite many traders throwing in the towel due to a frankly complicated market (active customers down 38% in H1 22), and prospective ones discouraged by a global equity slump (new customers down 58%), the brokerage has increased revenue by 48% and EBITDA by 68%, all driven by a 127% increase in ARPU. The stock is basically at all-time highs. This is because Plus 500 feeds on volatility - and the current violent moves we are seeing allows them to generate record ARPU. However, too much downside volatility for too long and customers leave faster than you can increase ARPU, and turnover falls.

Moreover, volatility is mean reverting and trading is hardly a growing market. This implies that assuming a stable user mix over time, Plus 500 should trade around a stable market cap/user multiple. Historically, Plus 500 has traded on a market cap between £4,600 and £17,000 per active customer with an average of £8,700. Currently, we are at £12,300.

When volatility reverts, we should see the trough multiple of ~£5000 per user again. Assuming this would happen now, Plus 500 has 60% downside. If users also continue to decline, that could accentuate a potential volatility slump. In Q3, revenue actually declined 8%, customer declines accelerated and ARPU growth slowed to 50% YoY growth, perhaps pointing to the start of a reversal.

However, considering an 8% buyback + dividend yield, and the fact that we could have elevated volatility for longer due to the uncertain macro environment, being early could be expensive.