EUXTF - Euronext Q2 Earnings: Patience Pays Off This Is Still A Buy

2023-07-29 02:53:25 ET

Summary

• Euronext's Q2 financial figures and program impress investors, leading to a positive stock price reaction.
• Cash trading sales and clearing turnover were down due to lower volatility, but the company was able to increase market share penetration.
• Euronext's debt increased slightly (for the dividend payment) but the company announced a share buyback program, maintaining unchanged its debt target reduction.
• Compelling valuation with attractive P/E for a resilient business. Our buy is confirmed.

We have just finished Euronext's Q2 analyst call (EUXTF). Yesterday, after the market closing, the company released its financial figures and announced a new share buyback program. Here at the Lab, we are positively impressed and not surprised to see a positive stock price reaction (>+6%). In our long-standing buy rating, we reported two key takeaways: 1) " Euronext Continues To Deleverage " and 2) " A Nice Play Link To The VIX. "

Downside risk already priced in

In our initiation of coverage, in turbulent market momentum , Mare's upside was related to volatility driven by macro headwinds. According to our analysis, this supported Euronext's results and earning resiliency. After analyzing the Q2 results, cash trading sales were down by 13.3% to €65.2 million. This was due to a less volatile environment. On a positive note, the company captured a 0.53 basis point fee thanks to a new fee policy following Borsa Italiana Optiq migration. In addition, clearing turnover was down by 6.4%, still related to lower volatility. As we can see from the VIX evolution below, since early January, volatility decreased by 60% from 23 to 13.9. Looking back to our analysis called " Attractive Valuation, Buy Again ," we were expecting lower trading volumes, and we forecasted a minus 6% (and we were very much in line with the minus 6.4% recorded by Euronext). This was unsurprising; we reaffirmed our Q3 and Q4 lower estimates.

Debt evolution was another supportive upside in our estimates. Looking at the Q2 total debt, net financial obligations slightly increased. In H1, Euronext's net debt/EBITDA reached 2.6x from 2.4x recorded in Q1 2023. This was mainly due to dividend payments for a total consideration of €237 million. With announcing a share buyback program for a total consideration of €200 million with a year time horizon, including the company's cash flow generation, we now arrived at a year-end debt of €1.8 billion. In our two-year financial forecast, debt should decrease by €735 million with a net debt/EBITDA of 1.2x. Here at the Lab, we are not including potential acquisitions and still forecasting a DPS increase of 5% for 2024.

Q2 results

Very briefly, the company closed its Q2 with a profit of €120 million (up by 0.9% on a yearly basis. Top-line sales reached €368.1 million, down by 1.8% compared to last year's period. Considering FX, the top-line sales only declined by 0.5%. EBITDA margin was also in line; however, more important to note is the fact that Euronext's non-volume related revenue reached 61%.

After the H1, we made no changes in our forward estimates. However, the additional upside might include the following:

1. Higher synergies in Q4 and a lowering Euronext's costs basis in H2 (the CEO reported this in the Q&A analyst call);
2. According to the CEO, the buyback " will not change our deleveraging path nor our dividend policy, and will preserve financial flexibility to capture market opportunities ." He confirmed that the program would not impact Euronext's deleveraging path or its rating. It will also be compatible with maintaining the group's financial flexibility to seize market opportunities and with its current dividend policy, which envisages a payout ratio on net profit of 50%. The buyback aim is to reduce 3% Euronext's share capital and cancel the stocks. In Q2, the company delivered a higher operating cash flow (€139.0 million vs €76.8 achieved last year). In our analysis, we slightly increased Euronext debt by dividing the share repurchase program into two equal tranches of €100 million equally deployed in H2 2023 and in H1 2024;
3. Cash trading captured revenue for 0.53 basis points. We are not pricing in this development because we would like to know how it is sustainable over the medium-term horizon.

Conclusion and valuation

No changes in our estimates, with downside protection already priced in and potential upside projection thanks to a resilient and growing business model. In 2024, we anticipate revenue and EBITDA growth of 3-4% and 5-6%, respectively. This is supported by Borsa Italiana integration, volume-recovery on cash trading, supportive Italian IPO legal framework, and equal rules at the EU level. We confirmed our valuation of €85 per share based on a P/E of 15x (applying a 25% discount vs. peers). Euronext main competitors are trading at 19x.

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