Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!!
My initial interest in Euronext came after reading this FT article in February that mentioned that the Amsterdam Stock Exchange appears to be a big winner from Brexit, but that Paris could be ahead in the long run as the Much of the trading in European stocks will move “ashore” to the continent.
What I found interesting is that Frankfurt doesn’t seem like a big winner, but that both Amsterdam and Paris are part of the listed Euronext NV Group. Personally, many of my own small-cap investments are listed on Euronext, but so far I really thought Euronext was more of a collection of back-water exchanges like Dublin. Lisbon or Brussels and no more serious competitor of the LSE and Deutsche Börse.
Euronext the company
Euronext has a colorful history, including merging and de-merging with the NYSE. After going public in 2014, they rolled out smaller European exchanges, including Dublin (2017) and Oslo (2019).
Your biggest step is still ahead: After the merger of LSE and Refinitiv, Euronext agreed to buy Borsa Italiana for ~ EUR 4.3 billionThe transaction will be carried out in the first half of 2021. After the transaction, Italy will be the top-selling country for Euronext.
Several basic tailwinds
Euronext was already benefiting significantly from a pandemic-induced increase in trade in 2020, with organic sales increasing + 20% plus around + 10% from the acquisition (Norway, Denmark). Other short to medium term tailwinds are:
- Brexit and the shift of European trade from the UK to the continent (see above)
- the continued increase in retail activity (Robinhood, Trade Republic etc) that will bring a new generation of investors to the market
- Sub-zero interest rates make stocks the only game in town, even for many institutional gamblers
- and the deluge of IPOs / SPACs / publicly traded ETFs that are clearly good for an exchange operator.
The upcoming transaction with Borsa Italiana
As a condition for the merger between Refinitiv and LSE, LSE had to sell Borsa Italiana. Euronext was ultimately able to acquire Borsa Italia for a relatively high price of EUR 4.3 billion.
With sales of 363 million in 2019 and EBITDA of 264 million in 2019, the acquisition doesn’t look cheap. However, according to the presentation, only 28% of sales come from trading, with stock trading accounting for only 10% of total sales, compared to 38% trading-related income for Euronext.
Due to a certain amount of outside financing (and of course without one-off costs), the acquisition is EPS-positive according to Euronext and has a percentage impact in the mid-single-digit range. The inclusion of synergies increases the “double-digit figure”.
The business as such
Run asA major exchange is good business. In 2020, the EBITDA margin was 58.8% and The net margin was 35.6%. The return on invested capital is north of + 20%. These are levels normally only attainable by software companies or some type of monopoly, and exchanges clearly belong to the latter. Deutsche Börse, for example, has an EBITDA margin of ~ 63%, the LSE Group in 2019 one of around 55%.
Historically, they had grown decently too. Sales rose from EUR 458 million in 2014 to currently EUR 884 million. a CAGR of 11.6%. Net profit rose from EUR 118 million in 2014 to EUR 315 million in 2020 with a even higher CAGR of 17.8% pa These are very impressive numbers in my opinion, made by paying out ~ 50% of net income as dividends.
A big question is what future growth will be like. Of course, there is always the risk of a market crash, but the overall activity of the securities market has increased over time. Right now, with many IPOs and a new generation of private investors, the volume continues to rise. There could also be new markets like carbon credits, electricity, etc. that could ensure growth for a longer period of time.
It also seems that the pandemic has (again) added to the allure of active trading, which should be good for exchanges,
I have not delved into further “roll-up” opportunities in Europe. I think smaller companies like Madrid or Vienna could be potential targets or grow in the areas of processing and data services.
It may sound sarcastic, but Borsa Italia’s subsidiary, MTS, is the only platform for paying Italian government bonds. This will be a growth market for the foreseeable future.
Overall, I think they (ex Borsa Italiana) won’t grow that fast in the past, but a growth rate of around 50% over the past 6 years might be realistic in the short to medium term.
For a good quality company like Euronext, the stock isn’t that expensive. With a (reported) PER of 19 and an EV / EBITDA of 12.6, the share is moderately valued. This is how it will look after the takeover of Borsa Italiana using the information given by Euronext (2.4 billion capital increase, 2 billion additional net debt, with some assumptions made by me):
Euronext after the acquisition
|Net debt YES 2020||600||2700|
|EV / EBITDA||12.6||16.4||13.9|
|EV / sales||7.4||9.3||7.9|
|Net profit margin||35.6%||34.4%|
|No stocks||70||mn shares||100|
|EPS (reported 2020/2021)||4.5||4.8|
We can see that the EV / EBITDA increases slightly due to the multiple payment, the P / E decreases due to the use of debt. Although the European stock exchange operators are difficult to compare, the “discount”, for example on the P / E of Deutsche Börse of ~ 24, is difficult to explain, especially in view of the historically better performance.
In the current environment I think a P / E in a range of 20-25 would be justified (If you look at any other sector, such a company would score an even higher multiple in the current environment.)
At EUR 5.5 per share of reported earnings in 2022 (my estimate) this would mean a price target of EUR 110 to EUR 138 or a return of +30 to + 60% compared to the current share price.
Although for me it is not a factor, tThe fact that they pay a decent and safe dividend (Proposal for fiscal 2020 is EUR 2.25 per share or ~ 2.6%) could be beneficial for some inevitable.
The most interesting aspect of this comparative stock chart is the different dates on which these stocks peaked after recovering from Covid-19: Deutsche Börse as early as August 2020, Euronext in October 2020 (after the Borsa Italiana deal was announced), and LSE Group in February 2021.
Risks / Why is the stock (relatively) cheap?
I think one reason is clearly the relatively expensive acquisition of Borsa Italiana and the upcoming capital raising. Euronext has a good track record of attracting and integrating smaller players, but a Big Fish Lite Borsa Italiana carries a higher risk. This transaction will incur additional fees of ~ EUR 100 million before taxes in 2021. The fact that Borsa Italiana was not previously independent is clearly a mitigating factor.
To be honest, I also don’t realize how strong the “reference shareholders” are. Some of these shareholders are owned by the French government, which is not optimal, and I think that a claim by the Italian government will be involved in the upcoming capital increase.
Another observation is that they have a relatively large board of directors for a relatively small company, with two more Italians joining after the takeover by Borsa Italia. Even so, since going public in 2014, they have seen impressive sales growth as well as an increase in profitability.
And of course a major market crash would not be good for business in the medium term.
Finally, there is also a small risk that “blockchain” and “coins” will become a real thing in a few years’ time and that the traditional exchange will lose some of its dominance. The odds are slim, but as I learned the hard way, the odds are not zero.
Overview of advantages / disadvantages
- High quality business with high margins and market entry barriers (market liquidity)
- Several fundamental tailwinds (Brexit, trading boom, SPACS / IPOs / ETFs)
- Apart from major acquisitions (Borsa Italiana), including lower trading reliability
- fair valuation, strong historical growth rates
- Part of sales and profit market-oriented
- Risk from major acquisition (Borsa Italiana) / capital increase
- possibly slower growth ahead
Euronext is clearly not my highest belief in being honest. But I think this is a nice little “value trade” that could make a decent return with an acceptable level of risk.
The underlying business is very attractive and Euronext has a very good track record since going public.
And as my own story shows, my investments with the highest conviction are very rarely my best performers 😉
Therefore I have decided to invest 2% of the portfolio in Euronext at a share price of EUR 85 / share. As mentioned above, my price target within the next 12 to 24 months is between EUR 110 and EUR 138 per share.
As a game plan, I would be ready to expand the position if there is strong downward pressure during the capital increase. If the stock rose quickly to the middle of my target range, I’d be ready to take profits too.