Last time, we concluded our publication by emphasizing Euronext (OTCPK:EUXTF) as a diamond in a volatile market environment. In detail, we were reporting higher trading volumes thanks to the new EU asset allocation, an increase in top-line sales from Borsa Italiana’s migration, and lower cost guidance, confirming our buy rating target. Despite the strong results released in early February, Euronext lost more than 13% to €67.3 at the stock price level and was under stress from macroeconomic challenges and analysts’ doubts about the sustainability of Allfunds offer.

Allfunds Offer

Founded in 2000, Allfunds is a trading platform for mutual funds and institutional investors which, as of September 2022, had €1,300 billion of assets under management. This news negatively surprises Wall Street mainly because the two groups specialize in different activities and also because Euronext took over Borsa Spa in 2020 with an investment of €4.44 billion and is still completing the synergies.

Last week, after due diligence, Euronext decided to withdraw its €5.5 billion offer and is still trading at pre Allfunds offer. Asset management companies are considered recurring and have good profit margins, which is why it attracts the attention of stock exchanges that suffer from periods of economic downturn and declining volatility. In detail, Euronext’s acquisition proposal was set at €8.75 per share with a 19% premium on the price preceding the news in a mixed operation between €5.69 in cash and 0.04059 new Euronext shares. The company was already working on the go-ahead with the two reference shareholders, Hellman & Friedman and BNP Paribas which together own 46.4% of Allfunds, but the board rejected the proposal. Aside from the Wall Street consideration (that was different when Deutsche Boerse proposed the acquisition in 2021), we should emphasize that Euronext has M&A capability and is quickly deleveraging.

Q4 results and long-term targets

Briefly comment on Euronext results, the company delivered solid accounts demonstrating the company’s diversified business model combined with cost discipline. Sales were confirmed and despite strong inflationary pressure, adjusted EBITDA reached €861.6 million and was up by +€90.6 million compared to the 2021 numbers.

Source: Euronext Q4 and FY 2022 results presentation

What is more important to report are our investment thesis considerations:

1. Non-volume-related sales represented 58.1% of 2022 underlying turnover, and this ratio reached 60% in Q4;
2. Adj. EBITDA margin reached 58.7% and the company upgrades its 2024 annual run-rate pre-tax synergies by €15 million to €115 million (in line with our expectations);
3. Net debt to adj. EBITDA stood at 2.4x thanks to a solid cash flow generation since Borsa Italiana Group’s closing;
4. As announced during the half-year results and considering a payout ratio of 50% of reported net income, the company is proposing a DPS of €2.22 per share for a total payment amount of €236.6 million;

The core data center is one of the strategic keys to the process of integrating Borsa Italiana into Euronext, which has already generated, at the end of the second quarter, €24.1 million of the synergies envisaged in the business plan, in terms of cumulative annual run rate. This contribution is expected to grow further, in detail, 25% of European stock trading physically passes through the Italian structure. The next step will be the migration of stock exchange trading to the Euronext platform, Optiq, starting in March. At that point, all the group’s share trading will take place in Italy for a total of around €12 billion in flows per day. But that is not all. MTS, the main Italian government bond trading platform, will also soon migrate here, once the NEXI technological assets will be completed. The customers co-located in Basildon have already followed Euronext in Bergamo, this was also supported by the technological level that the company has managed to reach, with positive effects also on their Scope2 and Scope3 emission, since this structure is a green data center, also designed to reduce the carbon footprint of Euronext itself. Customers interested in co-location were guaranteed fairness and proximity. The stunts told by Michael Lewis in “The Big Short”, when in Chicago there was a competition to “pull“a cable as short as possible from one’s control center to the central one, are far away.

Conclusion and Valuation

With Borsa Italiana’s integration almost completed and a safer balance sheet (with a higher dividend payment expected), we are not surprised to see that Euronext continues its growth strategy through external lines. The company is currently trading at a 14x the price/earnings ratio and an EV/EBITDA ratio lower than 12x, well below the comps average. In line with our buy case recap, we are still missing the company’s latest data. And looking at the just-released February numbers, there were already 5 new IPOs in 2023 compared to the 15 achieved in 2022, while equity/fixed income volumes were still at a minus 20% compared to last year’s results. Despite that, with 60% of non-volume related revenue recorded in Q4, and a volatile macroeconomic environment, we still see Euronext stock as a safe play on VIX. Therefore, we decided to reiterate our valuation to €98 per share maintaining our outperforming rating.

Source: Euronext Monthly volumes

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