ERNXY - Euronext Continues To Deleverage

2023-05-17 21:31:53 ET

Summary

• In Q1, profit reached €96.5 million and was a beat thanks to IPOs (led by Milan and Oslo).
• A retail platform is planned for trading US and European securities not in the current circuit.
• Again higher synergies are expected. Non-volume revenue at 58% of the total Q1 turnover. Our buy rating is then confirmed.

In our last publication titled ' Euronext Is Still A Gem ' and released in mid-March, we reiterated our long-term positive view on the European exchange player, Euronext N.V. (EUXTF). Here at the Lab, we were surprised about the negative Wall Street reaction to Allfunds' potential deal; however, after a due diligence process, the transaction was not completed, and Euronext's stock price was up by an additional 6%. Our internal team emphasized how the company is quickly deleveraging and has M&A optionality. In addition, we support our buy rating for the following reasons: 1) ' Higher EU Asset Allocation ', 2) ' The European Nasdaq ' upside, and 3) ' Higher Synergies Expected ' with Borsa Italiana.

Q1 Update

The holding company of the seven stock exchanges (Amsterdam, Brussels, Dublin, Lisbon, Milan, Oslo, and Paris) closed Q1 with a profit of €96.5 million and a minus 33% compared to 2022 Q1 numbers. Last year, we emphasized how Euronext was ' A Diamond In A Volatile Environment ' and this was due to the Russian invasion that hike the financial market's volatility. The net income figure goes beyond the estimates which were set at €94.7 million. Euronext revenue reached €372.3 million (-5.9% on a yearly basis) and was in line with consensus expectation, and the adjusted EBITDA reached €218.5 million, down 13% year on year, but beyond Bloomberg consensus average of €214.7 million, which now collects 14 buys, 7 holds, and only one sell on the stock. The EBITDA margin also contracted to 58.7% from 63.7% in Q1 2022.

Looking at the company's division, listing revenues came at €54.7 million, while trading revenues reached €128.9 million and post-trade top-line sales recorded €94 million. All these divisions achieved a negative growth trajectory. On the other hand, revenues from Advanced-Data services grew by 7%, technological ones reached €27.6 million signing a plus 19% and those linked to services were also up by 18%.

Euronext turned out to be the first group in Europe for IPOs (12 of which 25% were from non-Euronext countries). These results were driven by Milan and Oslo (Eurogroup Lamination and Seacrest Petroleum were the largest). In September 2022, we provided a regulatory upside on a new Italian regulation to support the company's listing process in Milan. Therefore, this outcome was very much in line with our high-level expectations. Despite that, many Italian IPOs are still postponed due to market conditions.

Going down to the P&L analysis, operating expenses increased by €200.5 million (+34% on Q1 2022) against estimates of €161.8 million. In the quarter, the group incurred implementation costs of €41.1 million, most of which related to €36 million for agreement termination with LCH SA. However, Euronext confirmed the 2023 guidance which indicates the expected operating expenses at €630 million.

On 27 March, Euronext completed the migration of stock markets and stock exchange ETFs to the Optiq trading platform, which immediately produced revenue synergies. The first phase of completion paves the way for the migration of other markets (bonds and derivatives) starting from the fourth quarter. This migration will lead to the closure of the negotiation contract with third parties, unlocking further cost synergies. This is well in line with our investment thesis, and in Q1 2023, additional synergies were achieved for a total value of €9.7 million. The figure brings the cost-saving synergies to €43.7 million. As explained by CEO Boujnah, the group now intends to develop the Gem market (Global Equity Market), the trading platform for US and European shares not listed on Euronext, and a new dark trading solution.

Conclusion and Valuation

Going to our upside, we should report that Euronext continues to deleverage. In detail net debt to reported EBITDA was at 2.4x versus 2.6x at year end. The ex-dividend date is on 23 May and the total dividend payment is expected to be €236.6 million, corresponding to a DPS of €2.22. Non-volume related sales still accounted for 58% of the total Q1 turnover compared to the 55% achieved in Q1 2022. With equity/fixed volumes still at a minus 20%, here at the Lab, we are still 2023 has a dynamic volatile environment and we still see the company has a safe play. For this reason, and following the Q1 results, we are not providing any changes in our twelve-month estimates and we reiterate our buy rating at €98 per share.

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