Euronext Stock: Attractive Valuation, Buy Again (OTCMKTS:EUXTF)
Euronext, a leading pan-European stock exchange, is currently presenting an attractive valuation opportunity for investors. Despite a recent decline in stock price, there are several positive catalysts that could drive a re-rating of the stock in the medium-term horizon.
Over the past decade, Euronext has successfully diversified and grown its business through both organic initiatives and acquisitions. Since its Initial Public Offering in 2014, the company has seen its top-line sales increase threefold, with cash trading now accounting for only 18% of total sales compared to 36% in 2014. However, the revenue generated from cash and post-trading activities has been less consistent compared to its competitors, resulting in lower overall revenue growth.
Despite forecasting another quarter of negative growth for Q2, there are several positive catalysts that could lead to a stock re-pricing. The recent confusion caused by the Allfunds offer serves as a wake-up call for the company to pursue future mergers and acquisitions with less leverage and focus on targets that can contribute to increased earnings per share (EPS) and return on invested capital (ROIC) above the weighted average cost of capital (WACC). Even without immediate transactions, Euronext has the potential to increase dividends while deleveraging, which could generate above-average returns for shareholders.
Looking ahead to Q2, lower trading volumes are expected due to the negative currency effect of a weaker Norwegian krone and decreased trading activity. While trading revenues saw a significant decline of 15% in Q1, a more moderate decline of 6% is forecasted for Q2. The latest data released by Euronext on a monthly basis supports this projection.
Taking into account the positive earnings per share (EPS) implications of the LCH stake disposal, the overall impact on EPS is estimated to be a decrease of 3% in 2023. The company’s two-year forecast on financial debt also shows a decrease to €835 million, with net debt on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at 1x. Currently, Euronext is trading at a discount of approximately 40% compared to historical levels and its closest peers. With its 2024 strategic plan aiming for organic revenue growth of 3-4% and organic EBITDA growth of 5-6%, thanks to the consolidation of Borsa Italiana, the company presents an attractive valuation. Even when applying a 25% discount to peers, a price-to-earnings (P/E) ratio of 15x yields a valuation of €85 per share. By comparison, major competitors such as DB1, LSEG, ICE, and Nasdaq are trading at a P/E ratio of 19x. Additionally, Euronext’s free cash flow (FCF) yield of 8% adequately covers the current dividend yield, providing a margin of safety for potential investors.
Risks to the buy rating on Euronext include the potential for lower trading volumes, significant non-accretive acquisitions with integration problems, decreased volatility and activities in financial markets, and regulatory changes. These factors could negatively impact the company’s performance and investment returns.
In conclusion, Euronext’s stock currently offers an attractive valuation opportunity for investors. While Q2 is expected to see lower trading volumes, the positive catalysts discussed, including potential future mergers and acquisitions, suggest a re-rating of the stock is likely in the medium-term horizon. Considering the company’s 2024 strategic plan and its discounted valuation compared to peers, Euronext presents a compelling investment opportunity for those looking for potential capital appreciation and dividend growth.
