ERNXY - Consider Euronext While It Is Undervalued
Summary
- Euronext currently is undervalued and should have above market returns in the years to come.
- It has a long-term growing dividend and a 10%+ Free Cash Flow Yield.
- It's a Pan-European leader after acquisition of Borsa Italiana.
- I initiate my coverage of Euronext with a buy rating.
Since the end of 2022, Euronext ( EUXTF ) ( ERNXY ) has underperformed its peers. This currently makes Euronext the most undervalued Exchange compared to its peers based on a couple different valuation metrics.
The company has a strong moat combined with slow and steady growth for years to come.
Investors should expect market beating returns in the years to come until Euronext has returned to its fair value.
Based on my DCF calculation Euronext is currently undervalued while it offers a lower risk.
Combined with a 10%+ free cashflow yield, an expected 10%+ IRR and a beta of 0.58 makes me initiate my buy rating on Euronext.
Company overview
Euronext currently is the leading pan-European stock exchange. They have a great track record of organic growth in combination with growth from M&A. Example of this can be their most recent acquisition of Borsa Italiana .
Euronext currently operates 7 local exchanges, one bond trading platform, one central counterparty clearing house and 2 central security depositories.
Euronext Group Overview (Company Presentation) Euronext M&A (Company Presentation)
Impact 2024
In their current 2024 financial strategic plan, Euronext is targeting a slow and steady 3% to 4% CAGR on the revenue side. Ebitda should grow 5% to 6% CAGR. Capex will remain the same. The current dividend policy still applies, this means a growing dividend over time. Please note here that it is based on 50% of net income so there can be years where the dividend will go down, but I expect over the longer term that the dividend will grow at a slow and steady pace.
The integration of Borsa Italiana continues going into 2023 and 2024. These are expected to further deliver synergies. The current synergies are already up +67% from 60M EUR to 100M EUR versus the targets set in October 2020.
Currently two major projects remain. Bringing the Italian cash equities and derivatives markets to Euronext Optiq and Euronext Clearing to start offer clearing services to all Euronext markets.
Source: Growth For Impact 2024 IR Page
Source: Investor Day Presentation
2024 Financial Targets (Company Presentation) Key projects (Company Presentation)
Undervalued
Currently Euronext appears to be undervalued based on a couple different valuation methods.
The metrics I will use are:
- Earnings per share
- Ebitda
- Free Cash Flow
- Sales
Before looking at the individual metrics I want to share this table that gives a quick overview of Euronext' valuations compared to its peers. You can see here that Euronext offers better valuations across the board.
| P/E Ratio |
| FCF Yield |
| EV/Ebitda |
| Dividend Yield |
| Total |
| 100% |
| 142.83 EUR |
| FCF |
| 6% |
| 6% FCF Yield |
| 25% |
| 173.94 EUR |
| EBITDA |
| 6% |
| 13x EV/EBITDA 2x DEBT/EBITDA |
| 25% |
| 104.90 EUR |
| EPS |
| 6% |
| 5% Earnings Yield |
| 25% |
| 141.31 EUR |
| Dividend |
| 6% |
| 2.40% Dividend Yield |
| 25% |
| 109.69 EUR |
The inputs I used for the IRR calculation are the following:
- Terminal Value of 142.83 EUR
- Buying Price of 74.32 EUR
- Dividend growth of 6%
Using these inputs the expected IRR is 9.91%. This is in line with what I expect my investments to make.
I also included a IRR distribution for future readers.
Internal Rate of Return calculation (Author's own software) Internal Rate of Return Distribution Model (Author's own software)
Risks
I believe regulatory risks are the main concern at this point. Euronext is currently the biggest pan-European stock exchange by market cap. Employing their current M&A strategy will become increasingly more difficult going into the future.
The dividend policy is not the best and could be a bit volatile on the short term if net income would drop. If you really want a reliable growing dividend year after year, Euronext might not be for you until they improve the policy. However I still expect a growing dividend by 5%-6% CAGR over the longer term (10+ years).
Conclusion
Long-term investors should consider buying Euronext while its valuations are suppressed. Please keep in mind that Euronext is based in France, where the standard dividend withholding tax rate is 30% .
Euronext currently has an expected IRR of almost 10%+ at the time of writing this. All metrics that I discussed in this article are suggesting Euronext is trading below its implied fair value. The IRR is nothing too crazy but considering that the beta of this stock is only 0.586, I would argue it is pretty good from a risk/reward perspective.
Looking at the DCF calculation we have a suggested buy price of 98.88 EUR. Currently you can buy Euronext for 74.32 EUR.
The stock is trading at very high free cash flow yield of 10%+.
Given all of this, I am initiating a buy rating on Euronext and plan on adding to my position below 70 EUR.
For further details see:
Consider Euronext While It Is Undervalued