DBOEY - Deutsche Börse: VIX Is A 2023 Key

2023-05-11 10:45:43 ET

Summary

• Solid Q1 results, dividend confirmed, and a superb balance sheet.
• Market volatility will remain a 2023 feature.
• Supportive 2023 outlook that supports a higher valuation.

Here at the Lab, we are supportive of the EU Diversified Financials sector and we have a buy rating target on Euronext (EUXTF). In 2022, we also performed a comps analysis with Deutsche Börse (DBOEY) (DBOEF) and the London Stock Exchange , and today, we are back to comment on the company's latest quarterly results.

Before providing our usual comment, it is important to recap our high-level investment highlights:

1. There is a higher EU Asset Allocation flow. In detail, after having analyzed the fund flow, year-to-date, there are a few signs of recovery. Fixed Income is performing well such as other thematic areas like ESG and Chinese ETF. This is supportive not only for Deutsche Börse but for the overall sector;
2. On a negative note, post the US banking crisis and also Credit Suisse's latest development, here at the Lab, we expect investor risk on fundraising to remain subdued for longer (even if we are not recording this development in Italy with Euronext);
3. Despite point 2), given the higher interest rate environment, Private Equity and Private Credit flow might further deteriorate and might lead to potential new investment in govies and listed corporate bonds;
4. Still related to the US regional banking, SVB, Silvergate, and Signature Bank had a significant volatility impact on the equity markets. More volatility equals more clearing and trading volumes, and the EU-diversified sector might benefit from a VIX spike.

Q1 update

Going to the company's specific data and to support our investment thesis, it is key to review Deutsche Börse's current trading statistics . On a monthly basis, the company publishes its numbers on Trading and Clearing, Securities Services, Fund Services, and Data & Analytics. These latest results provided a continued strong revenue growth well above Wall Street expectations.

In numbers, before commenting on the company's division, Deutsche Börse delivered a 16% sales growth at €1.23 billion with an EBITDA growth of 12% at €772 million. A positive revenue trajectory was recorded due to a secular growth rate of 7% and a cyclical effect at 9% thanks to higher market volatilities. At the aggregate level, the company recorded a 2% net revenue beat. Q1 net income reached €473 million and was up 12% compared to the same quarter last year with EPS at €2.70.

In early February, the company originally guided the 2023 outlook of sales between €4.5 and €4.7 billion with an EBITDA estimate in the €2.6 - €2.8 billion range; however, given the solid Q1 performance, Deutsche Börse now expects to reach the guidance upper end or to " slightly exceed it if the strong cyclical tailwinds continue ".

Looking at the company's main division, the average cash collateral balance reached €17.9 billion was lower than estimated in Q1, and here at the Lab, we interpret it as a 'normalization' ratio that indicates that net interest income will go up. Trading & Clearing, Securities Services, and Fund Services all beat consensus. In detail, we should report a seasonality in the Data & Analytics division. Q1 top-line sales were lower than Wall Street consensus expectations; however, there is a stronger ESG data services demand in Q2/Q3. In the Securities Services division, the high level of fixed-income issuance was a positive catalyst for the company.

On 22 March 2023, the US court awarded in favor of the creditors of Iran in the Peterson II case. Deutsche Börse was involved but this decision does not cause any financial or material change to the overall company's risk.

Conclusion and valuation

Higher financial derivatives and commodities volatility and volumes will benefit the company's bottom line. This will be coupled with higher custody and settlement fees. Given the recent earnings upgrade, we decided to raise DB's target price to €190 and our EPS 2023 by 2.5%. This is also negatively offset by lower expectations in the Clearstream Banking Net Interest Income forecast. Our valuation is in line with its P/E historical average set at 17.5x. Market volatility will remain a 2023 feature that cannot go unnoticed. On pages 60 to 87 of DB's Annual Report 2022 , there is a full risk section. In addition, our downside risks also include 1) lower monthly trading volume, 2) lower cash collateral balance data, 3) M&A risks, and 4) inflationary pressures with wage inflation.

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