Dutch delight

Flatex 30 September 2019 Update
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Flatex

Dutch delight

Financial services

Scale research report - Update

30 September 2019

Price

€24.9

Market cap

€488m

Share price graph

Share details

Code

FTK

Listing

Deutsche Börse Scale

Shares in issue

19.6m

Business description

Flatex (formerly FinTech Group) is an integrated online brokerage business. It covers two areas: technology and financial services, which includes a bank and a brokerage business.

Bull

Attractively valued against brokerage peer group in FY20.

Favourable regulatory environment within Europe.

Opportunities for organic growth by rolling out the brokerage across new regions in the eurozone.

Bear

Focused on the German and Austrian markets with limited geographical exposure.

The company does not pay a dividend as the focus is on investing for growth.

Low/negative eurozone interest rates make it challenging to generate returns on client money.

Analyst

Pedro Fonseca

+44 (0)20 3077 5700

Flatex (after its online brokerage brand; previously FinTech) reported a 10% y-o-y increase in revenue in H119. Earnings fell 9% y-o-y to €8.6m (ROE 10.8%) but were +5% y-o-y after adjusting for securities write downs. The successful roll-out of online brokerage to the Netherlands contributed to management raising its FY19 EBITDA margin guidance from 29% to 31% in August. Flatex expects to expand into Spain in Q419. Based on consensus, shares trade at a discount to peers on both P/E and EV/EBIT.

H119: Steady progress

Transaction volume declined by 13% as trading in lower margin CFD and FX fell as expected. However, trading in higher margin products, such as ETP, are growing and revenue in the Fin division (which houses the brokerage business) grew 6.5%. The number of clients grew 14% y-o-y. The impact of the introduction of IFRS 16 boosted EBITDA by €1.4m (€19.7m reported, +7% y-o-y), but was earnings neutral because there was a corresponding offset in depreciation and interest expenses.

Good start in the Netherlands, Spain is next

In July, Flatex launched operations in the Netherlands, expanding out of its core markets, Germany and Austria. The objective was 20k customers by the end of the year in the Netherlands, but it secured 10k in just eight weeks as customers were attracted by zero fees (Flatex receives fees from its banking partners), integrated brokerage/banking platform and broad range of trading products. Spain is next and management expects the launch (forecast for Q419) to be even lower cost and more time efficient. It expects to expand into another two to three countries in 2020.

Strategic options being considered

Flatex announced in July that it has hired Lazard to help review its options to take best advantage of growth opportunities. These could include strategic partnerships, a possible partial sale of the company and the acquisition of new investors. This has led to some newspaper speculation, but no decisions have been taken.

Valuation: Discount for premium growth

Flatex is trading on a P/E of 21.9x for FY19 and 17.0x for FY20 on consensus forecasts. Both its FY20 P/E and EV/EBIT ratios are at significant discount to its B2B and B2C peer average. Consensus is expecting a strong H219; we believe the market is probably factoring in a successful international expansion.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/17

107.0

32.1

1.01

0

24.7

0

12/18

125.1

42.4

1.12

0

22.2

0

12/19e

140.2

44.4

1.14

0

21.9

0

12/20e

158.1

55.1

1.47

0

17.0

0

Source: Company data, Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FinTech renamed Flatex

In August 2019 FinTech changed its name to Flatex. Although the name FinTech benefits from some of the positive connotations of the fintech sector, management felt the image typically associated with that sector (start-ups with short trading history and usually still burning cash) was not appropriate and could be confusing. While there is a technology angle to the company, Flatex has been a cash flow generating company for many years and has a significant customer base. Flatex is the well-known brand of the core online broker business and the name also reflects its (‘flat’) pricing strategy.

International expansion

The successful roll-out of Flatex in the Netherlands that began in June 2019 contributed to management upgrading its FY19 EBITDA margin guidance to 31% in August after previously raising it from 27% to 29%. The attraction of zero fees, broad product range and good customer service has helped it gain market share. The partnership with the banks providing some of the traded products, essentially the exchange-traded products (ETP), allows Flatex to provide trading at zero cost to the customer.

Flatex is preparing to launch in Spain in Q419 with similar price and product strategy. It has earmarked Sweden, Italy and France as expansion targets for 2020.

In Germany and Austria, Flatex already has a very significant market share of nearly 25% in Germany and about 50% in Austria. International expansion therefore makes sense as a growth strategy, particularly given its efficient IT platform and capacity to deliver a low-cost advantage, which will only grow with greater scale. The company has been investing to optimise the platform for different markets, for example it is now available in five languages.

H119 results

Flatex reported H119 earnings of €8.6m, a 9% y-o-y fall. If we adjust the numbers for securities write downs, then earnings would have been +5% y-o-y at €9.5m.

Revenue was up 10% y-o-y, with the Financial (Fin) division growing 6.5% and the Technology (Tech) division growing 7.6%. Consolidation effects and other revenue led to the higher revenue growth numbers. Transaction volume was down 13% y-o-y and there has been a decline in lower margin contract for a difference (CFD, a form of derivative trading) and foreign exchange (FX) products. Management expected this following the agreement in which Commerzbank took over Flatex’s CFD order flow execution as market marker. Flatex’s revenue growth is being delivered from higher-margin products, especially ETP.

The Tech division did relatively better than Fin on a year-on-year basis, helped by the advanced stage of the development of some of the projects. However, annual comparisons are somewhat difficult due to changes in the allocation of costs between the two divisions. The consolidation effect also knocks off 12% (€8.9m) of the combined revenue of the Fin and Tech groups. As a result, the divisional EBITDA margins shown in Exhibit 1 are understated. Management estimates that the Fin group is operating at a c 35% EBITDA margin and the Tech group at c 20%.

The number of customers continues to grow at a good pace (14% y-o-y), while customer balances grew 6% y-o-y. Earlier this year, the company expected to add 60k customers to the 290k customers it had at the end of 2018. In the first six months it added 23k and with the successful start in the Netherlands, and with Spain expected to launch in Q419, the company looks on track to deliver its 60k target and may indeed exceed this. The initial goal was 20k clients in the Netherlands in 2019, but 10k were achieved in only eight weeks.

Exhibit 1: Key performance indicators

Business volumes

H116

H216

H117

H217

H118

H218

H119

Transactions executed (000's)

4,976

5,486

5,505

5,767

6,628

5,855

5,792

Number of retail customers (000's)

194

212

235

254

275

290

313

Transactions per customer per year

51.4

51.7

46.9

45.4

48.2

40.3

37.0

Customer assets under management (€m)

9,416

10,855

11,238

11,794

12,120

10,995

12,813

of which: securities account volume

8,367

9,512

10,310

10,910

11,166

10,000

11,869

of which: deposits account volume

1,049

1,343

929

884

954

995

945

Year-on-year (%)

Transactions executed (000s)

11

5

20

2

-13

Number of retail customers (000s)

21

20

17

14

14

Transactions per customer per year

(9)

(12)

3

(11)

(23)

Customer assets under management (€m)

19

9

8

(7)

6

Source: Company data

Exhibit 2: Income summary with segments

 €000s (unless otherwise stated)

H117

H217

H118

H218

H119

H119/8

(y-o-y %)

Fin

Revenues

41,414

47,699

52,256

54,884

55,667

6.5

Raw materials and consumables used

(12,660)

(16,028)

(14,060)

(30,457)

(24,071)

71.2

Personnel expenses

(7,464)

(7,889)

(8,578)

(8,696)

(4,578)

-46.6

Other administrative expenses

(11,874)

(13,332)

(14,495)

(2,506)

(4,152)

-71.4

EBITDA

9,416

10,450

15,123

13,225

12,594

-16.7

EBITDA (%)

22.7%

21.9%

28.9%

24.1%

22.6%

Tech

Revenues

17,844

12,798

16,378

23,352

17,627

7.6

Raw materials and consumables used

(3,315)

(622)

(1,834)

(3,628)

(1,750)

-4.6

Personnel expenses

(6,465)

3,763

(6,205)

(3,265)

(10,116)

63.0

Other administrative expenses

(4,479)

1,429

(5,061)

(5,718)

(8,887)

75.6

EBITDA

3,585

17,367

3,277

10,741

7,147

118.1

EBITDA (%)

8.7%

36.4%

6.3%

19.6%

12.8%

Other/consolidation effects

Revenues

(9,696)

(3,046)

(10,136)

(11,634)

(8,945)

Raw materials and consumables used

1,925

(285)

909

12,223

5,562

Personnel expenses

2,512

(7,600)

2,554

2,276

2,148

Other administrative expenses

5,259

2,186

6,673

(2,865)

1,235

EBITDA

0

(8,745)

0

0

0

Total

Revenues

49,562

57,451

58,498

66,602

64,349

10.0

Raw materials and consumables used

(14,050)

(16,935)

(14,985)

(21,862)

(20,259)

35.2

Personnel expenses

(11,417)

(11,726)

(12,229)

(9,685)

(12,546)

2.6

Other administrative expenses

(11,094)

(9,717)

(12,883)

(11,089)

(11,804)

-8.4

EBITDA

13,001

19,073

18,401

23,966

19,740

7.3

EBITDA (%)

26.2%

33.2%

31.5%

36.0%

30.7%

Depreciation and amortisation

(2,590)

(3,000)

(3,527)

(4,653)

(5,962)

69.0

EBIT

10,411

16,074

14,874

19,313

13,779

-7.4

Financial results

(674)

(614)

(957)

(1,222)

(1,153)

20.5

PBT

9,737

15,460

13,917

18,091

12,625

-9.3

Income tax expense

(2,699)

(5,480)

(4,442)

(6,523)

(4,079)

-8.2

Tax rate

27.7%

35.4%

31.9%

36.1%

32.3%

Earnings from continuing activities

7,037

9,981

9,474

11,568

8,547

-9.8

Earnings from discontinued operations

(88)

(132)

(94)

94

Consolidated net profit

6,949

9,849

9,380

11,662

8,547

-8.9

Source: Company data

IFRS 16 impact on numbers

The introduction of IFRS 16 (which governs the accounting of leases) affected Flatex’s H119 numbers, but the net impact on earnings was negligible (only €100k). IFRS 16 removes the leasing costs from the operating line and replaces it with depreciation of the capitalised leases (classified as ‘right to use’ assets and amounting to €8.3m) and financial expenses.

As such, IFRS 16 boosted Flatex’s EBITDA by €1.4m in H119. If it were not for IFRS 16, then EBITDA would have been flat y-o-y instead of +7.3% y-o-y. The IFRS 16 boost to EBITDA was offset by €1.2m in additional depreciation and €0.2m in financial expenses. On the balance sheet, the assets were offset by leasing liability with no impact on equity.

The cash flow shown is driven greatly by changes in customer cash deposits in Flatex’s banking operations. These are customer cash balances and therefore not a significant indicator of available cash. We have shown the debt position to give a better idea of gearing and we also note that the company disclosed that free liquidity was a comfortable €58m at end of H119.

Exhibit 3: Balance sheet and cash flow

Balance sheet (€000s)

H217

H118

H218

H119

Total non current assets

97,373

102,502

132,493

139,596

Total current assets

1,009,677

1,062,963

1,095,245

1,074,390

Assets from discontinued operations

383

344

0

0

Total assets

1,107,433

1,165,808

1,227,738

1,213,986

Total non-current liabilities

29,392

30,249

30,395

34,140

of which financial

16,040

12,957

9,874

6,790

Total current liabilities

965,317

1,013,738

1,030,118

996,619

of which financial

68,473

72,447

59,478

65,720

Total liabilities

994,709

1,043,987

1,060,513

1,030,759

Equity

112,724

121,821

167,225

183,227

Total financial liabilities

84,513

85,404

69,352

72,510

Cash flow

H118

H218

H119

Cash flow operations - before banking

14,411

3,125

30,765

Cash flow from banking operations

233,291

2,814

-71,035

Cash flow from operations

247,702

5,939

-40,270

Cash flow from investments

(6,562)

(21,194)

(15,165)

Cash flow from financing

(2,018)

34,178

7,666

Net cash flow

239,122

18,923

(47,769)

Cash and cash equivalent beg of year

397,002

(397,002)

655,046

Cash and cash equivalent end of year

636,068

18,979

607,277

Source: Company data

Valuation

Flatex is trading on a consensus P/E of 21.9x for FY19 and 17.0x for FY20. Its FY20 P/E discount is more than 10% versus the average for both B2B and B2C peers. Flatex’s EV/EBIT ratios are also below the peer average. This discount seems interesting if consensus forecasts are achieved. Flatex’s consensus forecasts show above average growth in both revenue and earnings, reflecting its healthy balance sheet and good competitive position.

Exhibit 4: Peer analytics

 

 

 

Shr price

Mtk cap

Rev grwth (y-o-y %)

EBIT margin (%)

P/E (x)

EV/EBIT (x)

 

 

Curr.

(curr)

(€m)

2019

2020

2019

2020

2019

2020

2019

2020

FTKG.DE

Flatex

EUR

25

487

15.3

12.7

25.4

28.3

21.9

17.0

19.1

15.2

AVANZ.ST

Avanza

SEK

79

1,141

9.2

13.7

41.8

43.0

27.7

23.4

101.6

87.1

CDBG.DE

Comdirect

EUR

12

1,700

6.6

-4.2

30.7

21.4

11.2

29.7

16.2

24.1

ETFC.O

Etrade

USD

44

9,567

1.5

-0.8

48.1

47.3

10.7

10.1

36.8

37.8

FBK.MI

FinecoBank

EUR

9

5,699

4.5

4.9

60.3

61.1

22.0

20.5

10.9

10.3

IBKR.K

Interactive brokers

USD

50

19,000

1.2

5.9

62.4

60.1

22.8

21.0

19.7

19.4

SQN.S

Swissquote

CHF

42

590

4.7

9.6

61.2

62.5

15.3

12.7

19.1

17.1

Average B2B ex-Flatex

 

 

 

4.6

4.8

50.8

49.2

18.3

19.5

34.1

32.6

CLXN.S

Crealogix

CHF

96

123

7.5

5.7

2.6

4.5

23.0

17.3

44.1

24.2

FRST.L

First Derivatives

GBP

2,280

690

12.8

10.0

12.7

12.9

26.2

23.6

20.4

18.3

GFTG.DE

GFT

EUR

7

181

1.3

3.4

5.1

6.1

12.4

9.6

14.5

11.7

SOPR.PA

Sopra Steria

USD

112

2,298

8.9

5.3

8.3

9.2

10.6

8.7

8.9

7.6

TEMN.S

Temenos

USD

163

10,910

16.9

12.2

30.9

32.6

46.9

40.1

41.1

34.7

Average B2C ex-Flatex

 

 

 

9.5

7.3

11.9

13.1

23.8

19.8

25.8

19.3

Source: Refinitiv

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