Euronext shares remain very attractive at current levels

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introduction

I like to invest in stock traders as they tend to benefit from increased levels of volatility and whether the markets are up or in total meltdown the stock trader should do pretty well on the costs. Of course, there are no guarantees in life, and some traders’ stock prices sometimes fluctuate with the market as well. I’ve been long on Euronext (OTCPK:EUXTF) for a while now and although the stock is trading around 60% higher than where I entered a while ago, the stock price fell about 20% from its 52-week high and is now attractive again.

Stock price chart

Yahoo finance

Euronext has its main listing on Euronext Paris where it is traded with ENX as stock symbol. With an average daily volume of nearly 300,000 shares, I highly recommend trading the company’s securities using the most liquid platform.

Unfortunately, the company’s website mainly contains download links only, but you can find all relevant information here.

Cash flow remains superb and the current correction is an opportunity

Euronext’s third quarter results show the impact of the acquisition of Borsa Italiana in 2021. Total third-quarter revenue jumped around 71% to €351 million and that was primarily – but not solely – attributable to the acquisition. But even without the acquisition of Borsa Italiana, turnover increased by around 10.2% on a like-for-like basis.

Operating expenses increased at a similar pace, resulting in EBITDA of 203 million euros in the third quarter. This represents an increase of around 72.4% on a reported basis and around 13.7% like-for-like (so even if you exclude the impact of the Borsa Italiana acquisition, Euronext would have performed very well), and EBITDA margin increased to around 58% (from 57.5% in Q3 2020).

income statement

Euronext Investor Relations

Net financing costs increased and Euronext issued more debt to complete the acquisition and net profit in the third quarter was approximately EUR 116 million, representing EPS of EUR 1.08 per share. And that’s about 17% more than Q3 2020 despite the extra spending on interest payments and despite the higher share count. The acquisition of Borsa Italiana is therefore immediately accretive to EPS and will continue to add value as new synergy perks are unlocked.

Euronext expected to generate approximately €60 million per year in annual synergy benefits, which will likely increase EPS by an additional €45 million or 40 cents per share once the new run rate is achieved. in the third year following the closing of the operation (in 2024) .

I’m mainly interested in exchange operators because they have very capex-light business models. In the third quarter of 2021, Euronext recorded an operating cash flow of EUR 213.5m but we should deduct an additional EUR 21m of tax, a profit of EUR 3m attributable to non-controlling interests and the 8.4 EUR million in rents and interest payments. In addition to this, the 213.5 million euros published by Euronext includes a contribution of 35 million euros from changes in working capital.

Cash Flow

Euronext Investor Relations

On an adjusted basis, operating cash flow was approximately €147 million and after deducting €22 million of capital expenditure (as shown in the image above), Euronext generated approximately €125 million euros of free cash flow. Spread over the number of existing shares of just over 107 million shares, this represents almost EUR 1.17 per share in free cash flow.

While it might not be easy to pull the trigger by paying 20 times Euronext earnings, the current free cash flow yield of 5.5% isn’t bad at all. Additionally, as the business unlocks additional synergy benefits, the free cash flow yield will increase by approximately 6%.

Euronext pays a dividend but also retains a substantial amount of cash on its balance sheet, which will help reduce its 3.15 billion euros in gross debt. This will subsequently reduce interest expense and further increase free cash flow.

Investment thesis

I was happy to see Euronext acquire Borsa Italiana as there are only a handful of exchanges left that are worth pursuing and could add value to the Euronext group. Unfortunately, the company had to complete a rights issue to raise funds to help fund the acquisition, but this also created the opportunity to add to the position at the issue price of less than EUR 60 per share. In addition, existing shareholders were able to request an over-allotment which acquired more shares at the already low price than the allotment if only the rights were exercised.

I have a long position on Euronext and I continue to sell put options with out-of-the-money strike prices. I have currently written two puts with a strike price of EUR 80 expiring in March. If Euronext is trading below EUR 80 at expiry, I will essentially buy stocks at a free cash flow yield north of 6%, which is fine with me.

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