Monday, 11 January 2016

Analysis of Euronext

Euronext, a Dutch stock exchange company

Company: Euronext

ISIN NL0006294274 | WKN A115MJ

Business: A Dutch operator of stock exchanges. They are currently operating stock exchanges in Belgium, France, the Netherlands, Portugal and in the UK. They claim they are the #1 listing venue in continental Europe, #1 cash trading venue in continental Europe and #2 listed derivatives trading venue in continental Europe.

Active: Belgium, France, the Netherlands, Portugal and the UK.

P/E: 27.2

Comment: I was a bit annoyed by the company because on their home page they only have the annual report for 2014 available. Weak!

This company was analysed due to a request posted on the Analysis Requests page. 

contrarian values of P/E, P/B, ROE as well as dividend for Euronext

The P/E for Euronext is awful with 27.2 and the P/B is also horrible with 9.4 which gives a very clear no go from Graham. The earnings to sales looks very nice with 24% and the ROE is excellent with almost 35%. The book to debt ratio is however only so, so with 0.7.
In the last two years they have had a yearly revenue growth rate of 1.0% which is very bad and this then gives us a motivated P/E of 9 to 11 which means that Euronext is today highly overvalued by the market.
Additionally they pay a silly dividend of 1.8% which even when being so silly it still correspond to 50% of their earnings so once again we see how overvalued they are today.

Conclusion: Graham says no to Euronext and so do I. It is a overvalued company that have almost 70% of their "assets" as goodwill and intangibles. So the P/E and P/B are far too high. The dividend is silly low and the only good thing is the ROE which in my opinion comes from being a leveraged service company.

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Lorenzo Nencioni said...

Dear Fredrik ,

thanks for your anaysis of USU and Euronext.

I agree with your analysis of Usu, the stock is ovevarvalued but I don’t agree with the analysis of Euronext.
You say that Euronext “ have almost 70% of their "assets" as goodwill and intangibles”.
I took interest in this stock after a raccomandation newsletter I received last summer regarding this stock.
Among the others they say:
The numbers indicate all the exchanges are pretty good businesses. In Japan, Spain and Greece, there is no meaningful local competition. As a result margins are higher. Deutsche Börse is not included in this comparison as most of its revenue is derived from the derivatives trading. The stock exchange itself is a relatively small segment of the business.
There are barriers to entry on the regulatory side. One would have to go through a ton (literally) of paperwork to found a new exchange.
There are important economics of scale. The ultimate goal of an exchange is to help individuals, firms and governments trade stocks, bonds and/or derivatives. Stocks are issued by firms in exchange for capital. Traditionally, stock exchanges have had three sources of revenue:
• Transaction fees (this increases as volume increases),
• The sale of transaction data to third parties, and
• Listing fees charged to the companies who issue the stocks.
It is worth noting that derivatives are not issued by companies to raise capital, and so there simply is no issuer to charge a listing fee. By definition, the incumbent exchange offers the greatest liquidity. For stocks, a new exchange would have to charge much higher listing fees because it has no other revenue to offset its costs. It is a barrier to entry. This explains why the traditional stock exchanges like Euronext are still around and highly profitable.
And than:

Relative value

Euronext, like ASE (the Athens exchange) trades at roughly 16 times earnings. In other words, as a group, the exchanges of Paris, Amsterdam and Brussels trade at the same price as the stock exchange of Athens!
The London stock exchange (together with the Milan exchange) is roughly twice the size of Euronext and has a market cap of $14 billion. This again indicates Euronext is worth twice its current price.
Relative value is of course not equal to intrinsic value. It may well be that the other stocks are wildly overpriced. However, the relative value could become relevant if any of the other exchanges chose to issue some of their expensive shares to acquire Euronext at a significant discount to their own price. This would be immediately accretive to their per-share earnings.
The relative discount of Euronext is a catalyst for further consolidation in the European stock market.
Sorry to bother you with all this long story i wanted just to tell that in my opinion Euronext even if the price is to high ha a kind of strategic value and these assetts are not just goowill and intangibles.
The dividend is low but sometimes I prefer a company with low dividend but good future perspective than the opposite ( what to do with good dividends if a company loose value year after year ?).

Lorenzo Nencioni said...

....or maybe that newsletter is just optimistic...and I am wrong...



Anonymous said...

Where do you get the P/E 16 from? Is it the estimated P/E for full year 2015? Or for 2016? When I calculate the running 12 months then I get a P/E of 20.5 for Euronext which in my opinion could still be compared to Deutsche Börse that have a running P/E of 18.3 even though as you say they have a lot of derivative trading I would still group them together.

I do not fully understand what you mean with relarive value of different stock exchanges. No matter the size of the different markets in my opinion it all comes down to what are the earnings compared to the price I as an investor have to pay for that company (which in this case is a stock exchange).

If i can get the company running the Athens stock exchange at P/E 5 normal earnings but the London stock exchange at P/E 25 normal earnings then I would always buy the Athens one.

What I try to say is that I do not know if Euronext is cheap in comparison to its peers but the earnings for 2015, based on the Q3 report, will be the highest in the last five years and I still find the P/E very high for a company showing extreme earnings. I could be wrong and this will be the start of a new era for Euronext with exploding earnings...

-Fredrik von Oberhausen