Flatex the New European Brokerage Powerhouse. Initiate With
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EQUITY RESEARCH flatex AG (FTK GR) flatex Initiating Coverage The New European Brokerage Powerhouse. Initiate EUROPE | Brokers, Asset Mgrs & Exchanges with Buy RATING BUY 6 May 2020 PRICE €28.25^ MARKET CAP Key Takeaway €765.6M / $835.7M PRICE TARGET (PT) €43.00 We initiate coverage of flatex with a Buy rating and a PT of €43. Our deep dive UPSIDE SCENARIO PT €52.00 analysis of the European brokerage market, as well as the detailed merger model DOWNSIDE SCENARIO PT €20.00 for flatex and DeGiro suggest that structural growth trends and the high synergy potential of both businesses are not priced in yet. Shares trade at a 25% discount ^Prior trading day's closing price unless otherwise noted. to their historical P/E; we expect a clear re-rating upon reg approval of the DeGiro acquisition (expected in 2Q20). FY Dec EUR 2019E 2020E 2021E 2022E Joining forces to consolidate the European brokerage market: flatex is among the EPS 0.95 1.60 2.27 2.72 leading players in the online brokerage market in Germany and Austria. Through FY P/E 29.7x 17.6x 12.4x 10.4x an attractive proposition of a flat-rate transaction fee and one of the broadest product offerings (>75,000 flatex-select ETP products) the firm achieved an average Figure 1 - Over €30m synergies from customer growth of 22% over the last five years. In December, flatex announced the combined trading flow, IT infrastrucutre acquisition of its Dutch competitor DeGiro, one of the few pan-European low-cost and cross-selling opportunities Marketing brokers with presence in 18 countries; the reg approval is still pending but expected 11% for 2Q20. Our deep dive analysis on the European brokerage market supports our Regulatory 10% view that the deal is highly accretive and will deliver double-digit earnings growth Trading Flow >EUR30m 46% through structural trends as well as a high synergy potential. synergies pa Acceleration of earnings growth through complementary set-up: The acquisition IT Architecture 33% price of €250m values DeGiro at 25x 2019 P/E and 18x 2019 EV/EBITDA, which appears expensive at first, but after accounting for €30m annual synergies (i.e . combined trading flow, cross-selling, leveraging of flatex's banking licence and Source: Jefferies, company data harmonised IT infrastructure) the economics look a lot more supportive at merely Figure 2 - flatex & DeGiro's combined 6x EBITDA. Together with the high economies of scale (a doubling of the number mid-term ambition 350 of transactions would nearly halve CPT from currently €1.45 to €0.80) we forecast 300 300 +55% an EBITDA margin expansion of 15ppt to 45% by FY22e, which is still below 250 193 200 +178% management's ambitious mid-term targets that suggest €300m revenues, €150m 150 150 EBITDA (50% margin), and EPS of €3.0 (implying a triplication of FY19e profits). 100 +186% 80 54 50 28 Gilding the black swan & outpacing a growing market: Due to the spike in volatility 0 resulting from the coronavirus spread, we expect 2020 to be a record year for Revenue (€m) EBITDA (€m) Net profit (€m) flatex ('19e) DeGiro ('19e) Pro forma ('19e) MT ambition flatex with 35% growth in brokerage revenues (on a stand-alone basis) and an even . Source: Jefferies, company data stronger trajectory for DeGiro (+51%). In 1Q20 both companies executed more than 17m transactions on a pro-forma basis (+130% YoY) and acquired over 170k new Figure 3 - FTK trades at a 25% discount to its 3-yr avg. fwd PE customer accounts (+324% YoY). Beyond 2020 our merger model suggests an 8% PE 3y Avg organic sales CAGR for the combined brokerage businesses, fuelled by structural 35 growth trends and continuous market share gains. 30 25 Synergy potential from DeGiro and structural growth trends not priced in yet: flatex 20 trades at a 25% discount to its 5-year average fwd P/E, despite a significantly 15 10 better earnings outlook now. In our view, the 12.6x P/E (FY21e) does not reflect the 5 exceptional customer growth YTD and broadly ignores the synergy potential from the 0 . 28/04/2017 28/10/2017 28/04/2018 28/10/2018 28/04/2019 28/10/2019 28/04/2020 DeGiro deal. Thus, we expect a clear re-rating once the reg approval comes through Source: Jefferies, Factset This report is intended for Jefferies clients only. Unauthorized distribution prohibited. and management demonstrates the near-term synergy realisation. Martin Comtesse, CFA * Equity Analyst +44 (0)20 7029 8772 [email protected] Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 45 to 50 of this report. * Jefferies International Limited EQUITY RESEARCH flatex AG (FTK GR) FLATEX (FTK GR) The Long View | Scenarios Estimates Base Case € 2019E 2020E 2021E 2022E Rev. (MM) 134.0 220.0 284.9 306.1 Our base case scenario assumes 32% top-line growth in the next three years, followed by an intermediate growth Previous rate of 5% and a terminal growth of 2%. Due to the EBITDA (MM) 40.2 88.0 119.5 137.2 high economies of scale and deal synergies, we model a margin uplift to 36% by FY22e but use a conservative Previous terminal margin estimate of 30%. Our fundamental DCF EBIT (MM) 30.6 68.2 93.8 109.7 yields a PT of €43, implying 19x/16x PE (FY21/22e). Previous Upside Scenario PBT (MM) 27.5 63.0 86.6 102.4 Our upside scenario assumes a stronger intermediate Previous growth rate of 8% and a sustainable EBIT margin of 36% EPS 0.95 1.60 2.27 2.72 for the terminal value. In this case our fundamental DCF Previous yields a PT of €52, implying 23x/19x PE (FY21/22e). Downside Scenario Valuation Our downside scenario assumes a stagnation of growth 2019E 2020E 2021E 2022E beyond 2022 and a terminal EBIT margin of only 25%. EV/Rev 5.2x 3.2x 2.4x 2.3x In this case our fundamental DCF yields a PT of €20, implying 9x/7x PE (FY21/22e). P/Rev 5.7x 3.5x 2.7x 2.5x EV/EBITDA 17.3x 7.9x 5.8x 5.1x | Investment Thesis / Where We Differ EV/EBIT 22.7x 10.2x 7.4x 6.3x flatex is among the leading players in the online FY P/E 29.7x 17.6x 12.4x 10.4x securities brokerage market in Germany and Austria. Through an attractive proposition of a flat-rate transaction fee (€5.90 per trade, regardless of volume) Market Data Financial Summary and one of the broadest product offerings (>75,000 flatex-select ETP products) the firm achieved an 52-Week Range: €31.65 - €16.28 Book Value (MM) €419.8 average customer growth of 22% over the last five Total Entprs. Value €693.5M Dividend Yield 0.0% years; accumulating to a total of roughly 370,000 active trading clients. In December flatex announced Avg. Daily Value MM (USD) 2.69 the acquisition of its Dutch competitor DeGiro, one of Float (%) 43.4% the few pan-European low-cost brokers with presence in 18 countries; the regulatory approval for the deal is still pending but expected for 2Q20. Due to the highly complementary set up of both players we expect an accelerated growth trajectory in the coming years and an active contribution to consolidation of the fragmented European brokerage markets. | Catalysts Reg approval for DeGiro deal (expected in 2Q20) 31 May FY19 report 30 Sep 1H20 report This report is intended for Jefferies clients only. Unauthorized distribution prohibited. 6 May 2020 2 Please see important disclosure information on pages 45 - 50 of this report. EQUITY RESEARCH flatex AG (FTK GR) Table of Contents Key Financial Output...................................................................................................... 4 Investment Thesis in Pictures........................................................................................... 5 Investment Thesis - Executive Summary.............................................................................. 6 Valuation..................................................................................................................... 9 Key Risks...................................................................................................................12 flatex & DeGiro: Joining forces to consolidate the fragmented European brokerage market................ 14 The largest pan-European low-cost broker................................................................... 14 A strategic fit that could stun competition: What both players bring to the table...................... 15 A detailed look at core KPIs reveals the complementary strengths of flatex and DeGiro.............. 17 1+1=4: Ample synergy potential make the deal economics work......................................... 19 Business Model........................................................................................................... 23 I. Brokerage business (FIN segment).......................................................................... 23 II. B2B business (TECH segment).............................................................................. 26 Operating Model and Detailed Forecast.............................................................................. 27 The fragmented European brokerage market leaves plenty of room for consolidation....................... 30 Key differences in business models separate the wheat from the chaff................................. 30 Same but different: Regional specifics require customized market cultivation strategies............ 33 The European brokerage market is poised for growth, given strong structural trends................. 35 Company History......................................................................................................... 39 Management Overview...................................................................................................39