Waiting for the regulatory go-ahead

Flatex 23 June 2020 Update
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Flatex

Waiting for the regulatory go-ahead

Financial services

Scale research report - Update

23 June 2020

Price

€41.95

Market cap

€822m

Share price graph

Share details

Code

FTK

Listing

Deutsche Börse Scale

Shares in issue

19.6m

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 within 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 FY19 of earnings €14.9m (-15% y-o-y) and a ROE of 8.6%. Lower market volatility affected the results, as did the costs of expansion into the Dutch market before the decision to acquire 100% of DEGIRO in December 2019 for €60m cash plus €190m in shares. The EBITDA margin was 28.5%, down 16.8% y-o-y. The friendly acquisition of DEGIRO is transformational, with greater scale and breath of products. Management has identified €30m in annual synergies. The deal will make Flatex Europe’s largest retail online broker, present in 18 countries, although it is still awaiting regulatory approval. Although the share price has almost doubled since the announcement of the DEGIRO acquisition, the shares trade at a discount to peers on both P/E and EV/EBIT despite consensus forecasts of above-average growth.

FY19: A mixed bag

Revenue was up 5.5% y-o-y, but the EBITDA margin of 28.5% was below >33.9% guidance. However, excluding one-off Dutch market entry costs it would have been 35%. Retail customers grew 27% y-o-y, ahead of expectations. Transaction volume declined by 1% as trading in lower-margin CFD and FX fell. However, trading in higher-margin products, such as ETP, is growing and financial (FIN) division revenue grew 5%. Financial debt was €81.5m (45% of equity) after paying €23.5m for an initial 9.4% DEGIRO stake. EBITDA was €37.6m and financial expenses only €3.1m. Adding the DEGIRO acquisition pro-forma results in debt of €118m, EBITDA of €51m and a debt to equity ratio of 56%, so debt levels would remain moderate.

DEGIRO merger transformational

The acquisition of DEGIRO, a Dutch pan-European online broker, would give Flatex greater scale and geographic presence, a proprietary trading engine and a broader product line. DEGIRO is a streamlined operation with a low-cost service centre in Sofia, Bulgaria. Based on FY19 pro-forma numbers, the combined entity would have 45% greater revenue and 34% more EBITDA and more than double the number of clients and transactions.

Valuation: Discount for premium growth

Flatex is trading on a P/E of 24.2x for FY20 and 17.6x 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. The acquisition’s regulatory approval could be a short-term catalyst for the share price.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/18

125.1

42.4

0.98

0.0

42.8

N/A

12/19

132.0

37.6

0.77

0.0

54.5

N/A

12/20e

210.3

82.8

1.73

0.0

24.2

N/A

12/21e

277.2

117.0

2.39

0.0

17.6

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.

FY19 results

Flatex reported FY19 of earnings €14.9m, down 15% y-o-y, and revenue of €132m, up 5.5% y-o-y. Reported EBITDA was €37.6m, down 11% y-o-y. The EBITDA margin was 28.5%, which is below management guidance of over 34%. Management blamed the costs of the expansion into the Dutch market, before the decision to acquire DEGIRO in December. Management estimates the EBITDA margin would have otherwise been 35%. In its presentation on the merger with DEGIRO in December 2019, management used an estimated FY19 EBITDA figure of €40m.

Flatex purchased an initial 9.4% stake (for €23.5m cash) in DEGIRO in December 2019 as a first step in the purchase of 100% of the company. Therefore, operationally there is no real impact from the DEGIRO announcement on the FY19 income statement.

The FIN division grew 5.3% while the technology (TECH) division fell 8.8% y-o-y. Consolidation effects and other revenue led to the higher revenue growth numbers, so the underlying segments’ growth is higher than the stand-alone figures.

Transaction volume fell 2% y-o-y, mainly due to reduced volume from lower margin contract for a difference (CFD, a form of derivative trading) and foreign exchange (FX) products. This FX and CFD volume decline is expected following the agreement in which Commerzbank took over Flatex’s CFD order flow execution as market marker. We also note that since 2017, the Federal Financial Supervisory Authority and the European Financial Supervisory Authority has gradually restricted CFD and FX trading. Flatex’s revenue growth is being delivered from higher-margin products, especially ETP, and it is encouraging to see that H219 total transaction volume grew 14% y-o-y despite the lower CFD/FX volume. We also note that market volatility (a key driver for revenue) was lower in FY19 than FY18.

Exhibit 1: Key performance indicators

Business volumes

FY16

FY17

FY18

FY19

Transactions executed (000s)

10,462

11,272

12,483

12,274

Number of retail customers (000s)

212

254

290

368

Transactions per customer per year

49.3

44.4

43.0

33.3

Customer assets under management (€m)

10,855

11,794

10,995

14,586

of which: securities account volume

9,512

10,910

10,000

13,600

of which: deposits account volume

1,343

884

995

986

Year-on-year (%)

Transactions executed

3

8

11

(2)

Number of retail customers

20

20

14

27

Transactions per customer per year

(14)

(10)

(3)

(22)

Customer assets under management

88

9

(7)

33

Source: Flatex

The TECH division has been supporting the market entry of the online broker into the Netherlands. This included IT and expanding the production line. Basic modules were also created for other European markets. The company also highlighted progress in its cloud enterprise resource planning solutions and that its partnership with SAP was expanded to include a reselling component. This allows its core banking system (FTX:CBS) to be combined with SAP in a simpler, more integrated manner from a single source. The advanced stage of several contracts also helped boost results. The TECH division achieved a 45.2% EBITDA margin, which compares favourably to the management forecast of ‘more than 35.3%’.

The number of retail customers grew an impressive 27% to 368,000; management had forecast more than 320,000. Besides organic growth in core markets, this also reflected the successful expansion in the Netherlands in FY19. Customer assets under management grew 33% to €14.6bn, helped by favourable financial markets.

Exhibit 2: Income summary with segments

 € 000s

FY17

FY18

FY19

FY19/18

FIN

Revenues

89,113

107,140

112,767

5.3%

Raw materials and consumables used

(28,688)

(44,517)

(45,465)

2.1%

Personnel expenses

(15,353)

(17,274)

(21,294)

23.3%

Other administrative expenses

(25,206)

(17,001)

(24,798)

45.9%

EBITDA

19,866

28,348

21,209

-25.2%

EBITDA margin %

22.3%

26.5%

18.8%

TECH

Revenues

30,642

39,730

36,230

-8.8%

Raw materials and consumables used

(3,937)

(5,462)

(5,608)

2.7%

Personnel expenses

(2,702)

(9,470)

(8,018)

-15.3%

Other administrative expenses

(3,050)

(10,779)

(6,234)

-42.2%

EBITDA

20,952

14,018

16,370

16.8%

EBITDA margin %

68.4%

35.3%

45.2%

Other/consolidation effects

Revenues

(12,742)

(21,770)

(17,045)

-21.7%

Raw materials and consumables used

1,640

13,132

12,901

-1.8%

Personnel expenses

(5,088)

4,830

3,904

-19.2%

Other administrative expenses

7,445

3,808

241

-93.7%

EBITDA

(8,744)

0

0

TOTAL

Revenues

107,013

125,100

131,952

5.5%

Raw materials and consumables used

(30,985)

(36,847)

(38,172)

3.6%

Personnel expenses

(23,143)

(21,914)

(25,409)

15.9%

Other administrative expenses

(20,811)

(23,972)

(30,791)

28.4%

EBITDA

32,074

42,368

37,580

-11.3%

EBITDA margin %

30.0%

33.9%

28.5%

Depreciation and amortisation

(5,590)

(8,180)

(12,829)

56.8%

Derecognition of financial assets*

0

(3,570)

0

EBIT

26,484

30,618

24,751

-19.2%

Financial results

(1,288)

(2,179)

(3,123)

43.3%

EBT

25,196

28,439

21,628

-23.9%

Income tax expense

(8,179)

(10,965)

(6,720)

-38.7%

Tax rate

32.5%

38.6%

31.1%

Earnings from continuing activities

17,017

17,473

14,908

-14.7%

Earnings from discontinued operations

(220)

0

0

Consolidated net profit

16,797

17,473

14,908

-14.7%

Source: Flatex. Note: *There was a write-down adjustment of €3.57m retrospective write-down of financial assets adjustment on FY18 figures. This reduces the reported FY18 earnings from €21m to €17.5m and the EPS from €1.12 to €0.98.

Volatility drives record Q120

Financial market volatility has been very high this year since the COVID-19 pandemic began. The economic uncertainty caused by the countering measures to control the disease has affected markets and volatility is a good thing for brokers. In April 2020, Flatex announced that more than 17m transactions (+130% y-o-y) had been executed in Q120 for Flatex and DEGIRO on a pro forma basis. There were more than 170,000 new customers in Q120, +324% versus Q119. The company disclosed that the pre-tax profit in Q120 of Flatex alone was greater than it was for FY19 (€21.6m).

We would caution that these volumes are extraordinary and are likely to come down when the market turbulence subsides.

DEGIRO purchase is transformational

Flatex’s DEGIRO purchase allows it greater scale, greater geographic presence, a proprietary trading engine and a broader product line. DEGIRO is a streamlined operation with a low-cost service centre in Sofia, Bulgaria and a wide presence across Europe.

The deal was announced on 13 December 2019 and is good for 100% of shares at a total price of €250m. The offer is €60m in cash and €190m in Flatex shares. The shares are priced at €25.33 each and 7.5m new shares will be issued. Flatex shares had been trading between €22 and €25 in the run-up to the announcement. The acquisition is fully supported by DEGIRO management and Flatex took a 9.4% initial stake paid in cash (€23.5m) in December 2019.

Approval by the regulatory authorities is yet to be finalised. The original expectation had been for a decision in Q220.

Flatex hired Lazard in mid-2019 to evaluate the strategic options of the business. At the time, it was explained to the market that the path taken could involve mergers, acquisitions, partnerships, new shareholders and even a possible sale of the company.

In its statements after the deal was announced, Flatex management stated it ‘realised that size, scaling, customer orientation and internationality are key success factors. We want to actively participate in the consolidation given our financial strength and to continue being in the driver seat. For our stakeholders, we consider inorganic growth to be significantly value creating’.

Flatex’s market share in its home market of Germany is already a dominant 50% with 25% in Austria. Although its expansion into the Netherlands was going well and Spain was lined up next, this acquisition allows a much quicker approach to scaling up aside from the other benefits from the acquisition.

Exhibit 3: 2019 pro-forma Flatex with DEGIRO combined

€m

Flatex

DEGIRO (est)

Combined

Mid-term ambition

Revenue

132

60

192

300

EBITDA

37.6

13.7

51

150

Net profit

15

10

25

Equity

182

26

208

Brokerage clients (000s)

368

470

838

Transactions (m), B2C only

11.2

18.6

29.8

EPS (€)

3.0

Source: Flatex

The acquisition allows Flatex to become the largest pan-European retail broker with a presence in 18 European counties and with the full value chain in-house.

The more than €30m annual synergies identified by the company 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).

Debt levels remain moderate after acquisition

Flatex’s balance sheet remains healthy, with moderate year-end debt of €81.5m. This is equivalent to 45% of equity, similar to FY18 (42%) and considerably below 75% in FY17.

If the regulators approve the deal (which we believe is likely), there is €36.5m to be paid in cash for the DEGIRO acquisition (the rest will be in shares). The deal with DEGIRO is being carried out on a net debt-free basis. Adding €36.5m to the existing debt and divide by the pro-forma combined equity FY19 of Flatex with DEGIRO (€212m) is equivalent to a debt to equity ratio of 56%. The pro-forma combined FY19 EBITDA of €51m makes the pro-forma debt level of €118m look very comfortable indeed.

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. The company had a free liquidity position of €29.9m after the December payment for the 9.4% stake in DEGIRO.

Exhibit 4: Balance sheet and cash flow

Balance sheet (€000s)

FY16

FY17

FY18

FY19

Intangible assets

57,339

62,953

82,664

92,722

Other

21,550

34,420

49,829

86,978

Total non current assets

78,889

97,373

132,493

179,700

Financial assets at FVOCI

514,335

177,517

57,374

61,547

Financial assets at FVPL

1,234

1,006

893

214

Cash loans due to local authorities

401,171

237,165

18,900

14,056

Current loans due to customers*

122,472

175,415

213,675

362,552

Equity instruments FVOCI-EK

82,465

68,644

Equity instruments FVPL-EK

0

66,049

Other receivables due to banks

12,328

12,610

40,466

31,239

Cash

389,202

397,002

655,046

468,616

Other

13,905

8,962

22,857

13,345

Assets from discontinued operations

459

383

0

0

Total current assets

1,454,647

1,009,677

1,091,676

1,086,262

Total assets

1,533,995

1,107,433

1,224,169

1,265,962

Financial

2,875

16,040

9,874

3,727

Other

11,933

13,352

20,521

34,983

Total non-current liabilities

14,808

29,392

30,395

38,710

Liabilities to customers

1,339,845

885,112

955,489

950,777

Liabilities to banks

60,275

61,010

57,259

71,694

Other financial liabilities

3,813

7,463

2,219

6,131

Other

24,624

11,732

15,151

16,449

Total current liabilities

1,428,557

965,317

1,030,118

1,045,051

Total liabilities

1,443,365

994,709

1,060,513

1,083,761

Equity

90,630

112,724

163,656

182,202

Total financial liabilities

66,963

84,513

69,352

81,552

Cash flow

FY17

FY18

FY19

Cash flow operations - before banking

23,729

17,536

49,427

Cash flow from banking operations

-23,473

232,535

-206,673

Cash flow from operations

112

250,071

-157,246

Cash flow from investments

(12,587)

(27,756)

(33,189)

Cash flow from financing

20,273

32,160

4,005

Net cash flow

7,799

254,475

(186,430)

Cash and cash equivalent beg of year

389,202

397,002

655,046

Cash and cash equivalent end of year

397,002

655,046

468,616

Source: Flatex

Valuation

Flatex’s share price has almost doubled since 13 December, with the market reacting very positively to the acquisition news. Furthermore, the market volatility has led to both Flatex and DEGIRO to post strong business volume figures in the first quarter of 2020 as aforementioned.

Flatex is now trading on forward P/E ratios of 24.2x (FY20e) and 17.6x (FY21e) based on consensus forecasts. FY20 is above the average for B2B peers (22.0x), but below that of the B2C (28.1x if we exclude loss-making outlier Crealogix). However, its 2021 P/E is noticeably lower than the averages for B2B (23.7x) and B2C (23.3x, ex Crealogix). Consensus is forecasting a 38% increase in Flatex’s EPS in FY21, which is above average of its peers. The B2B average forecast EPS falls in FY21.

Consensus expects Flatex’s EBIT margin to increase from 31.6% to 34.8% between FY20 and FY21 and only one of the peers (Sopra Steria) in Exhibit 5 has a lower FY21 EV/EBIT than Flatex’s (12.2x).

So, besides the optimism regarding the DEGIRO acquisition, the market is also clearly positive about Flatex’s business model and the growth outlook underpinned by its healthy balance sheet and good competitive position. However, given the growth expectations, it is possible that some further positive re-rating of the shares may occur when (and if) the acquisition is approved the regulatory authorities.

Exhibit 5: Peer analytics

 

 

 

 

 

Curr.

Shr price

Mtk cap

Rev grwth (y-o-y %)

EBIT margin (%)

P/E (x)

EV/EBIT (x)

(curr)

(€m)

2020e

2021e

2020e

2021e

2020e

2021e

2020e

2021e

FTKG.DE

Flatex

EUR

42.0

822

56.5

31.8

31.6

34.8

24.2

17.6

17.5

12.1

AVANZ.ST

Avanza

SEK

133

1,941

39.3

-5.0

51.2

43.9

26.6

32.3

84.8

104.4

CDBG.DE

Comdirect

EUR

14

1,928

12.2

-4.2

34.0

28.5

18.2

22.2

14.6

18.2

ETFC.O

Etrade

USD

48

9,581

-11.6

-5.6

35.5

34.5

17.5

19.5

53.0

57.9

FBK.MI

FinecoBank

EUR

12

7,396

11.9

-1.4

62.8

62.0

24.7

25.1

12.1

12.4

IBKR.K

Interactive brokers

USD

42

15,450

-7.5

-3.0

48.9

40.2

24.0

25.3

23.7

29.7

SQN.S

Swissquote

CHF

80

1,158

12.9

7.8

26.0

27.4

20.8

17.7

63.4

56.0

Avg. B2B*

 

 

 

9.5

-1.9

43.1

39.4

22.0

23.7

41.9

46.4

CLXN.S

Crealogix

CHF

94

123

-1.7

5.2

-4.9

-2.8

-341.8

113.3

-24.0

-40.0

FRST.L

First Derivatives

GBP

2,370

719

-2.9

6.0

12.9

13.1

37.7

31.3

24.3

22.5

GFTG.DE

GFT

EUR

10

271

-0.1

6.8

4.0

5.4

20.0

14.8

19.1

13.3

SOPR.PA

Sopra Steria

USD

109

2,252

-3.2

3.8

6.4

7.9

13.2

10.0

11.3

8.9

TEMN.S

Temenos

USD

146

10,094

-2.9

12.7

34.5

33.9

41.7

37.0

37.5

33.8

Avg. B2C*

 

 

 

-2.1

6.9

10.6

11.5

-45.9

41.3

13.6

7.7

Source: Refinitiv. * ex-Flatex Note: Priced at 22 June 2020.


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Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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