EurONEXT NV ( ISIN NL0006294274) – Backwater Stock Exchange or “GARP” Brexit Winner ?

Disclaimer: This is not Investment Advice. PLEASE DO YOUR OWN RESEARCH !!!!!

Official_Euronext_logo

Background:

My initial interest in Euronext came after reading this FT article in February which mentions that the Amsterdam Stock Exchange seems to be a big winner of Brexit, but that in the long run Paris could come out on top as most of the trading in European shares will move “on shore” to the continent.

What I found interesting is that Frankfurt doesn’t seem to be a big winner but that both, Amsterdam and Paris belong to stock listed Euronext NV Group. Personally, a lot of my own small cap investments are listed on Euronext , but so far I really thought that Euronext is more a collection of “back water” exchanges like Dublin. Lisbon or Brussels rather than a more serious competitor to LSE and Deutsche Börse.

Euronext the company

Euronext has a colorful history, among others they merged and de-merged with the NYSE. After going public in 2014, they have been rolling up smaller European stock exchanges, among them Dublin (2017) and Oslo (2019).

Their biggest move is yet to come: After the Merger of LSE and Refinitiv, Euronext agreed to buy Borsa Italiana for ~4,3 bn EUR, the transaction will be executed in the first half of 2021. After the transaction, Italy will be the biggest country by revenues for Euronext.

Multiple fundamental tailwinds

Euronext did already benefit significantly from a pandemic driven increase in trading in 2020 with organic sales increasing by +20% plus around +10% increase from acquisition (Norway, Denmark). Other short to mid-term tailwinds are:

  • Brexit and the move of European trading from UK to the continent (see above)
  • the continued increase in retail activity (Robinhood, Trade Republic etc.) which will bring a new generation of investors to the market
  • Below zero interest rates make shares the only game in town also for many institutional players
  • and the flood of IPOs/SPACs/listed ETFs that clearly are good for a stock exchange operator.

The upcoming Borsa Italiana transaction

As a condition of the merger between Refinitiv and LSE, LSE had to divest Borsa Italiana. Euronext finally got to acquire Borsa Italia at a relatively steep price of 4,3 bn EUR

With 363 mn 2019 sales and 264 mn 2019 EBITDA, the acquisition doesn’t look cheap, however according to the presentation, only 28% of revenues are from trading, equity trading only amounts for 10% of total revenue compared to a share of 38% trading related revenue for Euronext.

Due to some debt financing (and of course excluding one-off costs) the acquisition is EPS accretive according to Euronext with a “mid single digit” percentage impact. Including synergies will increase “double digit”.

The business as such

Running a significant stock exchange is good business. In 2020, EBITDA margin has been 58,8% and net margin has been 35,6%. Returns in invested capital are north of +20%. These are levels that normally only can be reached by software companies or some kind of monopolies and stock exchanges clearly belong to the latter. Deutsche Börse for instance runs at ~63% EBITDA Margin, the LSE Group at around 55% in 2019.

Historically, they also had grown decently. Sales increased from 458 mn EUR in 2014 to the current 884 mn, a CAGR of 11,6%. Net profit increased from 118 mn EUR in 2014 to 315 mn in 2020 with an even greater CAGR of 17,8% p.a. These are very impressive numbers in my opinion and have been achieved with paying out ~50% of net profit as dividend.

A big question is how future growth will look like. Of course there is always the risk of a market crash, but overall securities market activity has grown over time. Especially currently, with lots of IPOs and a new generation of retail investors, volumes keep rising. Plus there might be new markets like Carbon credits, electricity etc. that might secure growth for a longer time.

It also seems that the pandemic has increased (again) the allure of active trading which should be good for exchanges,

I haven’t looked deep into further “roll up “opportunities within Europe, I think smaller players like Madrid or Vienna might potentially be targets or they can maybe grow in the areas of settlement and data services.

It might sound sarcastic, but Borsa Italia’s subsidiary MTS is the sole platform to settle Italian Government bonds. This will be a growth market for the foreseeable future in size. 

Overall I do think that (ex Borsa Italiana) they will not grow as fast in the past, but a growth rate at around 50% of the last 6 years could be realistic in the short to mid-term.

Valuation

For a high quality business like Euronext, the stock is not that expensive. With a (reported) P/E of 19 and EV/EBITDA of 12,6, the stock is moderately priced. This is how things will look after the Borsa Italiana acquisition using the information given by Euronext (2,4 bn capital increase, 2 bn additional net debt, with some assumptions made by me).:

Euronext post acquisition
     
  Euronext Borsa Italia Combined
Market cap 5950 4325 8350
Net debt YE 2020 600   2700
       
Sales 884 464 1400
EBITDA 520 264 795
Net income 315   482
       
P/E 18,9   17,3
EV/EBITDA 12,6 16,4 13,9
EV/Sales 7,4 9,3 7,9
       
EBITDA Margin 58,8% 56,9% 56,8%
Net profit margin 35,6%   34,4%
       
No Shares 70 mn shares 100
Share price 85    
EPS (reported 2020/2021) 4,5   4,8

We can see that EV/EBITDA goes up a little due to the multiple paid, P/E goes down due to the use of debt. Although the European stock market operators are difficult to compare, the “discount” for instance to Deutsche Boerse P/E of ~24 is hard to explain, especially looking at the historically better performance.

In the current environment, I do think that a P/E in a range of 20-25 would be justified (if you look at any other sector, such a company would command an even higher multiple in the current environment).

With 5,5 EUR per share of reported profits in 2022 (my estimate), this would translate in a price target of 110-138 EUR or a range of +30 to +60% in returns from the current share price.

Although it is not a factor for me, the fact that they pay out a decent and safe Dividend (proposal for FY 2020 is 2,25 EUR per share or ~2,6%) could be a benefit for some inevstors.

 

Stock chart:

The most interesting aspect of this comparison stock chart are the different dates when these stocks have peaked after the Covid-19 rebound: Deutsche Börse already in August 2020, Euronext in Oct, 2020 (after the announcement of the Borsa Italiana Deal) and LSE Group in February 2021.

EN vs DB vs LSE

Risks/ Why is the stock (relatively) cheap

I think one reason is clearly the relatively expensive Borsa Italiana acquisition and the pending capital raising. Euronext has a good track record in acquiring and integrating smaller players but a “Big Fish” lite Borsa Italiana is higher risk. There will also be extra charges in 2021 for this transaction in an amount of ~100 mn EUR pre tax. The fact that Borsa Italiana hasn’t been independent before is clearly a mitigating factor.

To be honest, I am also not clear how strong the impact of the “reference shareholders” Group is. Some of these shareholders are French Government owned which is not optimal and I think an Italian Goevnerment owned entitiy will participate in the upcoming capital increase.

Another observation is that they have a relatively large management board for a relatively small company with two more Italians joining after the Borsa Italia take over. Despite that they have achieved both, impressive revenue growth and increase in profitability since they went public in 2014.

And of course, a big market crash would in the mid term not be good for business.

Finally, there is also a small risk that “Blockchain” and “Coins” will be a real thing in a few years time and traditional exchanges will lose some of their dominance. The probability is small but as I learned the hard way, the probability is not zero.

 

Overview Pro’s/Cons

Pros:

  • high quality business with high margins and barriers to entry (marketplace liquidity)
  • Multiple fundamental tail winds (Brexit, trading boom, SPACS/IPOs/ETFs)
  • Upside from large acquisition (Borsa Italiana) including less reliabce on trading
  • reasonable valuation, strong historical growth rates

Cons:

  • part of sales and profits market driven
  • risk from big acquisition (Borsa Italiana) / capital increase
  • potentially slower growth ahead 

Summary:

Euronext is clearly not my highest conviction idea to be frank. But I do think that is a nice small “value trade” that could yield a decent return with an acceptable amount of risk.

The underlying business is highly attractive and Euronext has a very good track record since going public.

And as my own history shows, my highest conviction investments are only very rarely my best performers 😉

Therefore I decided to allocate 2% of the portfolio into Euronext at a share price of 85 EUR/share. As mentioned above, my price target within the next 12-24 months is between 110-138 EUR/share.

As a game plan, I would prepared to add to the position if during the capital increase there would be strong pressure to the downside. If the stock would move up quickly to the middle of my target range i would also be prepared to take profits.

 

 

 

 

 

 

19 comments

  • First of all, thank you for all the great articles – I am a passive reader for quite a while now.

    As you are looking into stock exchanges, have you reconsidered Lang und Schwarz (WKN 645932)?
    The EPS 2020 was €12,00, of which Q4 was €4,42 (see ad hoc February 17th). The ad hoc also contains an interesting phrase: “Wir konnten bereits zur Hälfte dieses Quartals das Ergebnis der Handelstätigkeit aus dem gesamten vierten Quartal 2020 übertreffen. Wir rechnen damit, das bisherige Rekordergebnis der gewöhnlichen Geschäftstätigkeit des vierten Quartals 2020 nochmals steigern zu können.”

    Assuming the EPS 2020 and the current share price (c. €120-125), we have a PE ratio of about 10, not yet reflecting the increased trading activity since Q4, which seems to have continued in Q1

  • Not a word about CBOE? Trading of European stocks is clearly shifting more and more from the the regulated markets (like Euronext AMS/PAR) to MTFs/OTFs. For example today March 31, CBOE has a 18% 5-day market share vs Euronext at 17%. You can also see that exactly a year ago to this day, this was 21% Euronext vs 16% CBOE.

    For Amsterdam, already 18% of all volume goes through CBOE vs Euronext 65%. Another, albeit less important, increasing competitor across all European markets is Turqoise. I hope this increasing competition will result in pricing pressures.

    https://www.cboe.com/europe/equities/market_share/market/venue/#dm=tbpcan&dr=day&mt=1&ms=0&hc=1&f=0&ID=e6bf20a14833c25152c7&V=90833bf6269ddf568286

  • Another issue coild also be the local fees and taxation regimes. For me, this may be a killer …

  • The 12% revenue CAGR looks quite impressive for an “old school” exchange. Have you tried to get to an organic growth figure?

    I did not get very far for the earlier years. In a more normal (or call it less crazy) year like 2019, organic growth was negative 1%. Obviously that is not very dynamic.

    • No, I did not dig that deep. Going forward, I do not expect these kinds of growth rates as mentioned.

      • I guess that’s a fair assumption. What I liked is that management bought shares in the open market (not just issuing to themselves) and apparently has not sold a single share since IPO.

  • I also like Singapore SE, for its robust value proposition.
    Comparing to Euronext now…

    • PE of Singapore SE seems to be 22, Historical growth in the past few years seems to be have been lower. What do I miss here ?

      • Singapore should be the safest stock exchange in Asia, as it is (together w Japan) the country with best governance and equality.
        Asia growth in general, higher regulatory standards (safer) than China & less conflicts of interest. Plus opportunities of many companies in Tiger countries to list in such a safer environment.
        Highly technologically developed environment & high margins. Threatened a bitby the growing Chinese stock exchanges though…

        • I could be wrong but I think a lot of mainland Chinese listed companies there were fraud. I used to look at every publicly traded companies in SG and found the breadth and depth of the market weak.

  • Sorry for the blunt question, but why would a market downturn be negative for them? For example, volumes were huge after Covid hit, which should be positive? I’d think that a prolonged period of very low volatility would be worse for them?

  • Why would you not own LSE?

  • Hi,

    Thanks for interesting idea. I would recommend you to look on Polish exchange with ticker GPW. You can find a piece from Swen Lorenz too. It is growing even stronger than this one with cca. 50% valuation, actually the cheapest exchange in developed world.

    S pozdravom, Best Regards,

    Erik Zeleny ________________________________

  • Check out this reasoning for the Polish company InPost to list in Amsterdam:

    “Sources said that on top of lower minimum free float requirements for international companies, Amsterdam is seen as the international listing venue of choice after Brexit.
    This is because Britain would no longer fall under the European regulatory authority and this could complicate trading for major European investors, one of the sources said.
    Separately, Amsterdam has emerged as a hub for technology listings, another source said.”

    Source: https://www.reuters.com/article/inpost-advent-ipo-idUSL8N2IV3JM

    InPost, for now, is a mainly Polish operator of parcel lockers (like DHL Packstation or Amazon Locker) with a clear focus on a European roll-out of their business. They already have a sizeable business in the UK and recently agreed to buy a similar business in France from the Otto Group for €565.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.