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Euronext offers a strong exchange

Published: 11:50 26 May 2015 BST

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Euronext is a pan-European exchange that includes Paris, Brussels, Amsterdam and Lisbon.  The group was listed in June 2014 at €20 and recently reached around €40.  Improving Eurozone equity markets have generated brisk trading and the ongoing economic recovery suggests that this is likely to continue.

 

Euronext is the result of European integration with the ambition being to create a single continental bourse for stocks and derivatives.  The group was formed in 2000 through the merger of the Paris, Brussels and Amsterdam exchanges.

 

Euronext was subsequently listed in 2001 and merged with the Lisbon stock exchange in 2002.  The New York Stock Exchange bought the company in 2007 and Intercontinental Exchange acquired the combined group in 2013.

 

The merry go round resulted in Euronext being spun off in June 2014 just as European markets were improving. The introduction of Eurozone QE in 2015 has further bolstered European markets in part due to the resultant euro weakness.   

 

Euronext’s market backdrop in June 2014  

 

 

Source: Euronext investor presentation

 

Euronext is currently the second largest European exchange group by cash trading volume after the London Stock Exchange.  The group is the third largest in European derivatives after Deutsche Boerse and ICE Europe.

 

Listed market exchanges have outperformed the general equity market if they are strong enough to attract growing volumes.  However, exchanges have also tended to be highly cyclical as trade volumes slump in equity bear markets.

 

Euronext’s modest listing valuation and positive trading conditions have seen the shares double in less than a year.  The group offer exposure to recovering European equity markets and improving investor sentiment.

 

 

Euronext’s drivers

 

In 2014 cash trading made up 36% of Euronext’s revenue with the group enjoying a 65% market share in continental Europe.  Over 90% of cash trading is equity driven with the rest coming from ETF’s, structured products and bonds.

 

Listing revenue made up 14% of Euronext’s revenue in 2014 and is also driven by market activity. IPO and follow-on listing fees are over a third of listing revenue and have increased as stronger markets support new capital raising activity.

 

Euronext’s €458m third party revenue in 2014

 

Source: Euronext investor presentation

 

Euronext saw total third party revenue rise 9% in 2014 to €458m as momentum picked up in the second half.  In the first quarter of 2015 the pace continued with a 9.6% increase on a year ago to €130m.  

 

In 2014 cash trading revenue rose by 19.7%, listing revenue rose by 15.8% and Market data and Indices revenue was up 11%.  Post trade revenue was up 6.5% but derivatives revenue fell 4.5% and Market Solutions revenue fell 18.3%.

 

The decline in Market solutions revenue reflects a period of transition due to the separation from NYSE Technologies.  However, Q1 2015 revenue from Market solutions was up by 4.3% which suggests that it will now make a positive impact.         

 

Against this backdrop the departure of the CEO, Dominique Cerutti, was a surprise but Euronext has put in place an interim replacement.  Mr Cerutti is moving on to a new challenge to lead the consulting firm Altran   

 

Euronext’s financials: Q1 2015 EPS up 500%

 

Euronext’s EPS rose by 35% in 2014 to €1.69 and the group paid out half of profits as a €0.84 dividend.  At the end of 2014 Euronext had a marginal net debt position and a debt to equity ratio of 32%, which was in line with peers.

 

Q1 2015 EPS rose to €0.68 from €0.11 the year before as cost cutting helped boost margins.  At the end of March the group also moved into a net cash position of €54.5m which follows a €140m debt repayment.

 

Euronext’s EBITDA margin came in at 45.8% in 2014 and in Q1 2015 improved to 52.2%.  A target of €80m of annualised cost savings by the end of 2016 should enable the group to meet its target of an EBITDA margin “close to 53%”.

 

Summary and valuation

 

Euronext listed at an attractive valuation and has seen the introduction of QE this year produce strong trading momentum.  Investor confidence remains fragile, though, with the threat of Greece leaving the Eurozone in June.

 

As such the recent momentum could stall but, in our view, the overall direction of travel should remain in tact as markets recover.  In April the average daily transactions on Euronext’s cash order book were up by an impressive 38%.

 

Euronext’s volume momentum

 

Source: Euronext investor presentation

 

Turning to the valuation and listed exchanges are difficult to compare due to their varying product exposures. Euronext is mainly driven by equities while other exchanges may have more derivative or market indices exposure.  

 

Nevertheless, Euronext doesn’t appear to be expensive given the current stage of the economic and equity market cycle.  The forecast P/E is 17.8X for 2015, with a yield of 2.7%, which falls to only 14.2X by 2017 with a yield of 4.1%.

 

By contrast the LSE is on a forecast P/E of 19.6X for 2015 and then 15.1X in 2017.  The Spanish exchange, Bolsas Y Mercados Espaneoles (BME), is on a forecast P/E of 18X for 2015 which falls to 17X by 2017. 

 

Euronext has a diversified position in Europe and is well placed to consolidate the remaining independent exchanges.  An improving balance sheet position may also allow scope for special dividend payments in the medium-term.

 

This report was produced by Fat Prophets Senior Research Analyst, Andrew Latto

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