ERNXY - Euronext: Higher EU Asset Allocation Reiterate Buy

Summary

• Higher asset allocation towards the EU will support Euronext.
• The company will benefit from a flourishing IPO market.
• Still trading at a lower valuation compared to Deutsche Börse and the LSE. The company is deleveraging and we also expect a DPS increase.

Since our last update (Q3 results comment), Euronext (EUXTF) delivered a stock price appreciation of 17%. Our internal team has a long-standing buy rating on the pan-European bourse that offers pre & post-trading services. In detail, our investment case was supported by: 1) market volatility using the VIX as a proxy, 2) higher synergies than expected with Borsa Italiana Group, 3) and a strong FCF generation which led to a dividend per share increase as well as a further deleverage. Over the year, we also emphasized how Borsa Italiana was working to simplify the IPO admission process and to streamline bureaucracy. The new Italian regulatory framework was another key supportive catalyst for our investment thesis.

Today we would like to emphasize three key takeaways:

1. In Italy, 2022 was not an exciting year for initial public offerings. This negative trend was also recorded in the rest of the World. The main IPOs reduction causes were primarily due to uncertainties and growing volatility associated with international geopolitical tensions. However, 2023 is expected to be very exciting for Euronext. Just in Italy, forecasts at Piazza Affari tell us that IPOs are expected to have a value of approximately €33 billion based on the market valuation of Plenitude ( ENI ), Prada, Ferretti Group, and Lamborghini (VWAGY);
2. Secondly, Bank of America's January Fund Manager Survey reported that the average allocation to US equities fell 27% over the month to net underweight by 39%, 2 standard deviations lower and below the long-term average and at its lowest data point since November 2005 (Fig 1). Conversely, allocations to Europe and Emerging Markets rose to +13% and to +26%, respectively. The reasons for US equities penalization were due to different sector allocations, higher multiples, and a more deteriorating macro picture. This renovated EU emphasis will support the Euronext trading platform;
3. The improved execution of the liquidity and trading segment (Supplemental Liquidity Provider) after the acquisition of Borsa Italiana seems to stabilize the EU trading market share, creating a stable background for synergies with Italy. Here at the Lab, we predict that Euronext's lower personnel costs compared to its competitors will allow for better management of wage inflation. For this reason, in our numbers, we expect an EPS growth between 2023-2025 of 3%. According to the company's latest indication, we also expect synergy to increase significantly in 2023-24 with the migration of Italian trading to the Optiq platform. This alone could generate up to €25 million in revenues and €30 million in savings (this is already priced in with our estimates).

Conclusion and Valution

Euronext stock is currently trading at 15.5x the price/earnings ratio expected in 2024 and 11.3x the EV/EBITDA ratio, below the average of its competitors worldwide, while the group continues to reduce its net debt position. Looking at the latest stats, there will be a revenue improvement in December trading volumes and also we expect an increase in revenue from Borsa Italiana's migration to the Optiq platform in 2023. The key catalyst will be the 2022 results release on the 9th of February. Ahead of the FY data and thanks to 1) higher estimates for 2023 IPO, 2) an increase in EU asset allocation, and 3) better personal costs; we decided to reiterate our buy rating target at €98 per share.

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