Grateful for volatility

Flatex 14 October 2020 Update
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Flatex

Grateful for volatility

Financial services

Scale research report - Update

14 October 2020

Price

€45.7

Market cap

€1,237m

Share price graph

Share details

Code

FTK

Listing

Deutsche Börse Scale

Shares in issue

27.2m

Business description

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

Bull

Merger with DEGIRO brings synergies (€30m identified by management) and greater geographic distribution, more technology and a broader product offering.

Attractively valued against brokerage peer group in FY20.

Favourable regulatory environment in Europe.

Bear

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

Pressure to deliver on announced significant synergies with DEGIRO acquisition.

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

Analyst

Pedro Fonseca

+44 (0)20 3077 5700

Flatex reported H120 earnings of €22.4m (+162% y-o-y) and ROE of 23.1%. Volatile markets helped trade executions jump 127% y-o-y to €13.1m. Client numbers continue to grow strongly, up 35% y-o-y. On 21 July 2020, the Dutch central bank gave Flatex the green light to acquire DEGIRO, a leading Dutch broker. The acquisition (agreed in December 2019) is transformational, adding greater scale and breadth of products to make Flatex Europe’s largest retail online broker, present in 18 countries. If we include DEGIRO, the combined number of transactions in H120 would have been 37.6m and the number of customers almost triples to 1.1 million. The shares have reacted well to the news, but still trade at a discount to peers on both P/E and EV/EBIT despite consensus forecasts of above average growth.

A very good H120

The strong revenue numbers allowed Flatex to report a record EBITDA margin of 42.8%, vs. 30.7% H119. The Financial division (FIN) drove earnings with an EBITDA margin of 44%, +216% y-o-y. Technology (TECH) division revenues grew 2.9%, but the EBITDA margin of 15.9% was below 20% for the first time in a long time. However, the margins tend to be volatile in this division. Financial debt was €73.5m (36% of equity). EBITDA was €42.7m and financial expenses only €1.7m.

DEGIRO acquisition closed in July

Following approval by the regulator in July, Flatex paid €36.4m in cash and issued 7.5m Flatex shares to other DEGIRO shareholders to acquire the remaining 90.6% of outstanding shares it did not already own. The acquisition of DEGIRO, a Dutch pan-European online broker, gives Flatex greater scale and geographic presence. It becomes Europe’s largest retail broker and is the fastest growing online broker in Europe. Management reiterated its €30m in annual cost synergies and DEGIRO is expected be fully consolidated from August 2020. Flatex’s debt level remains moderate even after the DEGIRO acquisition. Combined debt is c €115m, with H120 EBITDA of €75m, a debt to equity ratio of 54% and an EBITDA to interest multiple of roughly 15x based on H120 numbers.

Valuation: Discount for premium growth

Flatex is trading on a P/E of 23.7x for FY20 and 18.3x for FY21 on consensus forecasts. Both its P/E and EV/EBIT ratios are at a discount to its B2B and B2C peer average despite consensus forecasting above-average growth.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

125.1

42.4

0.98

0.0

46.6

N/A

12/19

132.0

37.6

0.77

0.0

59.4

N/A

12/20e

230.4

86.5

1.92

0.0

23.7

N/A

12/21e

289.4

115.8

2.49

0.0

18.3

N/A

Source: Flatex, 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.

H120 results

Flatex reported H120 of earnings €22.4m, +162% y-o-y, and revenue of €100m, up 55% y-o-y. Reported EBITDA was €42.7m, up 116% y-o-y. The very strong business volume growth led to a total group EBITDA margin expanding to a record 42.8%. We would caution that these volumes are extraordinary and are likely to come down when the market turbulence subsides. Therefore, the margin might not be easy to sustain or improve.

The FIN division (where the brokerage resides) revenue grew 63%, while the TECH division rose 2.9% y-o-y. As often happens with Flatex, consolidation effects and other revenue contributed to the higher segment revenue growth numbers, so the underlying segments’ growth is higher than the total group’s figures.

The volatile markets in the first half of 2020 led to a 127% increase in executed transactions year-on-year. The number of clients grew strongly to 424,000, +35% y-o-y, and +17% since FY19.

Exhibit 1: Key performance indicators

Business volumes

H118

H218

H119

H219

H120

Transactions executed (000s)

6,628

5,855

5,792

6,692

13,119

Number of retail customers (000s)

275

290

313

368

424

Transactions per customer per year

48.2

40.3

37.0

36.4

61.9

Customer assets under management (€m)

12,120

10,995

12,813

14,586

13,634

of which: securities account volume

11,166

10,000

11,869

13,600

12,229

of which: deposits account volume

954

995

945

986

1,405

Year-on-year (%)

Transactions executed

20

2

(13)

14

127

Number of retail customers

17

14

14

27

35

Transactions per customer per year

3

(11)

(23)

(10)

67

Customer assets under management

8

(7)

6

33

6

Source: Flatex

The TECH division EBITDA margin was 15.9% for H120 and this is below average (for example in H119 it was 40%). This is a B2B business, focused in Germany, and the EBITDA margin tends to be volatile reflecting different contracts and different stages of fulfilling them. We note that in its interim report, management has guided for a ‘moderately increasing’ EBITDA for FY20 compared to FY19 (it was 45.2%). The TECH division also provides important support for FIN’s operations including the expansion abroad and management expects it to play a critical role in the integration with DEGIRO.

Exhibit 2: Income summary by segment

€000s

H118

H119

H120

H120/19 %

FIN Division

Revenues

52,256

55,667

90,500

62.6

Raw materials and consumables used

(14,060)

(24,071)

(23,299)

-3.2

Personnel expenses

(8,578)

(4,578)

(12,843)

180.5

Other administrative expenses

(14,495)

(4,152)

(14,536)

250.1

EBITDA

15,123

12,594

39,821

216.2

EBITDA margin %

28.9%

22.6%

44.0%

TECH Division

Revenues

16,378

17,627

18,137

2.9

Raw materials and consumables used

(1,834)

(1,750)

(1,707)

-2.5

Personnel expenses

(6,205)

(10,116)

(10,093)

-0.2

Other administrative expenses

(5,061)

(8,887)

(3,457)

-61.1

EBITDA

3,277

7,147

2,880

-59.7

EBITDA margin %

20.0%

40.5%

15.9%

Other/consolidation effects

Revenues

(10,136)

(8,945)

(8,859)

Raw materials and consumables used

909

5,562

5,564

Personnel expenses

2,554

2,148

2,609

Other administrative expenses

6,673

1,235

686

EBITDA

0

0

0

Source: Flatex

Exhibit 3: Income summary – total group

€000s

H118

H119

H120

H120/19 %

Revenues

58,498

64,350

99,778

55.1

Raw materials and consumables used

(14,985)

(20,259)

(19,442)

-4.0

Personnel expenses

(12,229)

(12,546)

(20,327)

62.0

Other administrative expenses

(12,883)

(11,804)

(17,307)

46.6

EBITDA

18,401

19,740

42,701

116.3

EBITDA margin %

31.5%

30.7%

42.8%

Depreciation and amortisation

(3,527)

(5,962)

(6,928)

16.2

EBIT

14,874

13,779

35,773

159.6

Financial results

(957)

(1,153)

(1,701)

47.5

EBT

13,917

12,625

34,072

169.9

Income tax expense

(4,442)

(4,079)

(11,698)

186.8

Tax rate

31.9%

32.3%

34.3%

Earnings from continuing activities

9,474

8,547

22,374

161.8

Earnings from discontinued operations

(220)

(94)

0

0

Consolidated net profit

9,380

8,547

22,374

161.8

Source: Flatex

Time to make acquisition work

Now that DEGIRO is being purchased, management’s focus is now to make the merger work. The merger transforms it into Europe’s largest retail broker with the whole value-chain in house. The five year target is €300m in revenue, EBITDA of €150m and EPS of €3.0.

This compares with current consensus market forecasts for EBITDA of €87m in FY20 and €116m in FY21. The pro-forma EBITDA of Flatex with DEGIRO was €75.2m in just the first six months of 2020, but volumes have been unusually strong and so doubling the half year result would not be an accurate extrapolation to full-year results, in our view.

Exhibit 4: Flatex with DEGIRO combined pro forma

Flatex

DEGIRO

Combined

Combined

€m

FY19

FY19

FY19

H120

Revenue

132

59

191

169

EBITDA

38

11

49

75

Net profit

15

8

23

46

Equity

182

24

207

255

Brokerage clients (000s)

368

482

850

1,000

Transactions (m), B2C only

12.3

19.1

31.4

37.6

Source: Flatex

The strategy will be to use both brands (Flatex and DEGIRO) but with same low-cost strategy. It remains a trading platform only business, which reduces regulatory administration and costs. It also retains the flat price approach for all asset types and transaction sizes. This currently is a maximum of €5.90 per trade. There will be improved product offering for both brands with the acquisition. For example, DEGIRO currently offers futures and options while Flatex does not, while Flatex offers extended trading hours and DEGRIO does not.

Flatex management reiterated the previously disclosed €30m in synergy cost savings (equal to 20% of operating costs in the five-year plan) that it expects to achieve already in FY21. These are broken down as follows: flow-related (€15–20m); IT savings (€10–15m); single corporate structure (€3–5m); and greater scale, such as marketing and bargaining power (€3–5m).

The original DEGIRO offer (a friendly transaction that was supported by its management) was for €60m in cash and €190m in Flatex shares and was agreed in December 2019. Flatex then purchased a 9.4% initial stake paid in cash (€23.5m). Following regulatory approval in July, on 30 July it paid the remaining cash (€36.4m) and issued 7.5m new shares to acquire the remaining 90.6% stake in the company. It now owns 100% of DEGIRO and expects to consolidate the results as of August 2020.

Exhibit 5: Balance sheet and cash flow

Balance sheet (€000s)

FY18

H119

H219

H120

Intangible assets

82,664

86,977

92,722

93,879

Other non-current assets

49,829

52,619

86,978

77,870

Total non-current assets

132,493

139,596

179,700

171,749

Financial assets

58,267

69,135

61,761

80,342

Current loans due to customers

213,675

232,230

362,552

422,622

Equity instruments

82,465

84,449

134,693

129,503

Cash

655,046

607,277

468,616

932,352

Other

82,223

81,299

58,640

43,595

Total current assets

1,091,676

1,074,390

1,086,262

1,608,414

Total assets

1,224,169

1,213,986

1,265,962

1,780,163

Total non-current liabilities

30,395

34,140

38,710

38,058

Liabilities to customers

955,489

917,234

950,777

1,429,248

Liabilities to banks

57,259

56,235

71,694

57,227

Other liabilities

17,370

23,150

22,580

51,247

Total current liabilities

1,030,118

996,619

1,045,051

1,537,722

Total liabilities

1,060,513

1,030,760

1,083,761

1,575,780

Equity

163,656

183,226

182,202

204,383

Total financial debt and leases

73,085

73,623

88,916

73,493

Cash flow

H119

H219

H120

Cash flow operations - before banking

30,765

18,662

52,074

Cash flow from banking operations

(71,035)

(135,638)

421,452

Cash flow from operations

(40,270)

(116,976)

473,526

Cash flow from investments

(15,165)

(18,024)

(5,297)

Cash flow from financing

7,666

(3,661)

(4,494)

Net cash flow

(47,769)

(138,661)

463,735

Cash and cash equivalent end of period

607,277

468,616

932,352

Source: Flatex

Valuation

Flatex’s share price has been strong over the last year. It reacted well to DEGIRO acquisition and Flatex had flagged to the market during Q120 that it was doing very well in the volatile financial markets. Flatex is now trading on forward P/E ratios of 23.7x (FY20e) and 18.3x (FY21e) based on consensus forecasts. FY20 is above the average for B2B peers (16.8x), but below that of the B2C (31.2x) if we exclude loss-making outlier Crealogix from the averages. Its 2021 P/E is lower than the averages for B2B (20.0x) and B2C (25.5x, ex Crealogix). Consensus is factoring in above-average EPS growth for Flatex; we suspect this is in good measure due to the acquisition of DEGIRO. Flatex has one of the lowest 2021 EV/EBIT ratios among its peers at 15.6x. Only Sopra Steria and FinecoBank are lower and both are showing less growth in consensus forecasts than Flatex. Its business model seems to be working and its balance sheet remains healthy even after the acquisition. Regulatory approval has been given, we think that management deliverance on the promised and expected acquisition potential will be a likely catalyst over next 12 months.

Exhibit 6: Peer analytics

Currency

Share price

Market cap

Revenue growth
(y-o-y %)

EBIT margin
(%)

P/E (x)

EV/EBIT (x)

(curr)

(€m)

2020e

2021e

2020e

2021e

2020e

2021e

2020e

2021e

FTKG.DE

Flatex

45.7

1,237

72.9

25.6

31.9

35.0

23.7

18.3

21.5

15.6

AVANZ.ST

Avanza

SEK

189

2,817

70.6

-13.5

64.6

52.9

26.8

36.7

56.7

80.0

CDBG.DE

Comdirect

14

1,954

28.4

-12.9

41.1

30.4

13.2

17.8

10.7

16.6

FBK.MI

FinecoBank

12

7,435

15.4

-0.9

63.7

62.9

24.3

24.7

13.9

14.2

IBKR.K

Interactive brokers

US$

51

17,897

6.8

-6.9

59.7

53.3

22.1

26.0

24.8

29.8

SQN.S

Swissquote

CHF

86

1,228

32.0

5.3

34.5

31.0

14.2

14.7

46.1

48.8

Average B2B*

 

 

 

25.5

-4.8

43.9

38.4

16.8

20.0

25.4

31.6

CLXN.S

Crealogix**

CHF

120

155

3.1

5.0

-1.5

2.5

-91.2

-89.8

-98.7

56.1

FRST.L

First Derivatives

£

3,490

1,053

-2.9

7.9

11.9

11.7

55.1

45.4

37.5

35.2

GFTG.DE

GFT

12

309

4.9

6.0

4.2

5.7

20.6

14.3

21.8

15.2

SOPR.PA

Sopra Steria

US$

140

2,853

-2.1

4.3

7.0

8.3

15.2

11.8

12.3

9.9

TEMN.S

Temenos

US$

122

8,385

-3.7

12.9

34.5

34.3

33.7

30.6

33.6

29.9

Average B2C*

 

 

 

-0.1

7.2

11.2

12.5

31.2

25.5

26.3

22.6

Source: Refinitiv. Note: *Ex-Flatex. **We have removed Crealogix from the P/E and EV averages. Priced at 9 October 2020.


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