DBOEY - Deutsche Börse: Recent Events Support Growth Prospects

2024-01-05 16:00:34 ET

Summary

• Deutsche Börse has reported positive operating performance and its recent acquisition of SimCorp improves its long-term growth prospects.
• The company's revenue growth of 15% YoY is driven by structural and cyclical factors, supported by strong volumes in the capital markets.
• Deutsche Boerse's strategy of business diversification and growth in non-trading segments, along with the SimCorp acquisition, positions it for future growth.

Deutsche Börse AG ( DBOEY ) has reported a positive operating performance in recent quarters, plus its recent acquisition of SimCorp improves its long-term growth prospects. Despite this, its valuation remains attractive, making it a good growth play in the European financial sector.

As I've covered in a previous article , Deutsche Boerse's growth prospects over the long term are quite strong within the European financial sector, making it an interesting growth play. Since then, its shares have performed relatively well, up by more than 16%, but very close to the overall stock market during the same period.

In this article, I update its most recent financial performance and investment case, to see if it remains an interesting growth play or not for long-term investors.

Recent Events

During the first nine months of 2023 , Deutsche Börse has maintained a positive operating momentum, supported by strong volumes in the capital markets. Indeed, the higher interest rate volatility in recent quarters has been an important support for its revenues, given that Deutsche Boerse has sizable exposure to derivatives linked to German government bonds.

While for many years interest rates in Europe remained quite low and volatility was not high, this market backdrop has changed considerably due to the inflationary environment over the past couple of years and rising interest rates in Europe since mid-2022, being a strong tailwind for higher transaction volumes related to interest rate derivatives.

Even though Deutsche Boerse's strategy has been focused on business diversification over the past few years, its Trading & Clearing unit still accounts for about half of its revenue, making it still quite exposed to transaction volumes in the capital markets.

Due to this background, the company was able to report revenue growth of 15% YoY during the first nine months of 2023, to more than €3.6 billion. This growth is explained by some 6% due to structural growth and 9% is related to cyclical factors, driven by higher interest rates in Securities and Fund services and higher volumes in the derivatives trading unit.

Despite inflationary pressures and higher expenses, including staff costs and investments, leading to organic cost growth of 8% YoY, its EBITDA increased by 14% YoY to €2.19 billion, showing that Deutsche Boerse was able to protect its profitability level during a period of strong pressure on overall costs.

Since my previous coverage on Deutsche Boerse, the company has announced and completed the acquisition of SimCorp , a Danish investment management software company, for about €3.9 billion. This acquisition enables Deutsche Boerse to expand its Investment Management solutions, being a good complement to its Data business. This acquisition fits well into its strategy to diversify its business and have a higher share of recurring revenues over the long term.

This transaction was an all-cash offer to SimCorp shareholders, supported by the company's management board, and was completed last October. SlimCorp has reported compounded annual revenue growth of about 10% over the past five years and some 60% of its annual revenues are recurring, making it a good fit within Deutsche Boerse's group.

Due to this significant acquisition and Deutsche Boerse's good operating momentum, the company raised its full-year guidance to revenues of about €5 billion (+18% YoY) and EBITDA of some €2.9 billion, comparing well with its initial guidance of €4.6 billion in revenues and €2.7 billion EBITDA.

Beyond its recent financial performance and the SimCorp acquisition, another important event was its investor day back in November, when Deutsche Boerse presented its updated strategy for the next three years.

The company's strategy remains focused on business diversification and growth in segments not related to trading, expecting to grow its business mainly organically. Indeed, after the recent acquisition of SimCorp, Deutsche Boerse's strategy is to integrate this business into its Investment Management solutions and achieve both revenue and cost synergies in the coming years, being its expected major growth driver in the near future.

Regarding its main financial targets, Deutsche Boerse aims to grow its revenues by about 10% annually from 2022-26, of which 7% comes from organic growth and 3% from the acquisition of SimCorp. This means its 2026 target is to achieve annual revenues of some €6.4 billion, which compares to about €5 billion expected in 2023.

Regarding costs and investments, Deutsche Boerse expects to increase costs by 5% annually and make capital expenditures of €300-400 million per year in infrastructure, which means its business margins should improve slightly during this period and cash flow, but free cash flow is expected to be impacted negatively by its capex needs.

Due to its expected investments in the coming years, Deutsche Boerse has revised downwards its capital return policy, expecting to distribute between 30-40% of its annual earnings to shareholders (vs. 40% expected in 2023), but still targeting a growing dividend during this period.

While this is negative for its share price in the near term, Deutsche Boerse has historically distributed a relatively small dividend and its yield has not been fantastic. Thus, its income appeal should remain rather low and the company's investment case is expected to remain mostly geared to growth rather than income over the next few years.

Indeed, its last annual dividend related to 2022 earnings was €3.60 per share and is expected to increase to €4.20 related to 2023 earnings, representing a dividend payout ratio of some 44%. At Deutsche Boerse's current share price, its forward dividend yield is about 2.3%, which is not particularly attractive compared to other stocks in the European financial sector, or even compared to other fixed-income alternatives, such as time deposits or bonds.

In addition to dividends, depending on the company's liquidity position and financial profile, it also aims to perform share buybacks occasionally, if it makes sense taking into account its capital management framework. Indeed, it has decided to start a €300 million share buyback program in Q1 2024, which represents less than 1% of its current market value and is not likely to be a major support for its share price in the short term.

Conclusion

Deutsche Boerse remains an interesting growth play within the European financial sector, supported by strong secular growth drivers and also a positive cyclical performance in recent quarters. Its recent acquisition of SimCorp seems to be a good fit for its business and gives Deutsche Boerse a new growth driver in the asset management solutions segment, improving its long-term growth prospects.

Regarding its valuation , Deutsche Boerse is currently trading at about 18x forward earnings, a similar multiple compared to last March, as its share price has increased more or less in line with earnings growth. This valuation continues to compare favorably with its own historical average and its closest peers, which trade at more than 20x earnings, thus Deutsche Boerse remains a good growth pick in the European financial sector.

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