This report is published by Research Dynamics, an independent research boutique


Stable revenue despite demanding markets

Flat YoY growth at operating revenues levels and positive outlook over the medium-term

Swissquote's result for the period was stable compared to 1H2018 excluding the one-off costs related to Internaxx integration, founding of Swissquote Pte Ltd. and outlays for a Brexit contingency plans. The operating revenues decreased marginally by 0.7% y/y to CHF 117.2mn. Similarly, the net revenues were almost flat at CHF 112.2mn (down 50bps y/y) adjusted for unexpected events and negative interest rates. The growth was primarily driven by robust net interest income, which increased 35.8% y/y to CHF 21.2mn (excluding the impact of negative interest rate of CHF 5.1mn) and also due to the 12.5% y/y increase in eFX income to CHF 39.5mn. The growth in eFX income was due to a significant increase (33.8% y/y) in assets held in eFX accounts of CHF 439.8mn. However, this was offset by the subdued results in net fee & commission income and trading income, which decreased by 17.9% y/y to CHF 45.6mn and 6.8% y/y to CHF 10.9mn, respectively. Although the results for 1H2019 were flat compared to the same period last year, net revenues sequentially improved by 10.3% with total assets held increasing by 28.1% to CHF 30.5bn. Buoyed by the improved operating matrix, management has upgraded the full year 2019 guidance, with net revenue expectation increasing 9.6% y/y to ~ CHF 235mn and pre-tax profit expectation increased to CHF 48mn (previously CHF 44mn) including an impact of ~CHF 6mn (previously CHF 10mn) at pre-tax profit levels on account of Internaxx Bank integration, founding of Swissquote Pte. Ltd and outflows for Brexit contingency plans. Out of the CHF 6mn one-off impact, the company has already incurred CHF 1.2mn in the first half and expects to incur ~5mn in the second half of 2019, with an additional CHF 1.8mn forecasted for the full year 2020.

At CHF 30.5bn, client assets rose 19.5% y/y, primarily driven by assets in trading accounts (20.9% y/y) to CHF 29.6bn, as the number of trading accounts increased to 264,210 (+5.8% y/y) and also supported by eFX assets which grew 33.8% y/y to CHF 439.8bn. Net new money inflow came in at CHF 3.4bn out of which 36.4% (CHF 1,241.5mn) was from Europe followed by APAC & Americas (22.1%), MEA (21.7%) and Switzerland (19.8%). Out of total CHF 3.4mn net new money inflow during the period, CHF 1.2mn was organic and the remaining CHF 2.2mn came from the Internaxx integration. Management expects organic net new money inflow of CHF 1.8bn in the second half of the year, which would take the net inflow to CHF 5.2mn for the entire year. The total number of accounts grew by 5.3% y/y to 339,172 reflecting a 20.9% increase in eForex accounts to 51,974 and a 27.2% increase in Robo-Advisory accounts to 3,026 and a 5.8% increase in trading client accounts to 264,210. All accounts witnessed significant growth, except savings accounts which decreased further by 26.0% y/y to 19,962, mainly due to the negative interest rate environment as well as the termination of the cooperation agreement with Swiss Life as of December 31, 2018.

Operating expenses increased to CHF 87.1mn (6.3% y/y), reflecting higher depreciation and amortisation expenses (25.0% y/y) due to the adoption of IFRS 16. This was partially offset by a 7.6% decline in other operating expenses to CHF 19.4mn. The Group continued to invest in technology, marketing and employees. Employee related expenses rose to CHF 40.7mn (+9.0% y/y) with the average number of employees growing by 10.9% to 680. Marketing expenses decreased by 9.4% y/y to CHF 10.8mn. The pre-tax profit margin narrowed to 22.4% (27.3% in 1H2018), while net profit declined by 14.3% to CHF 22.0mn and the corresponding margin contracted by 3.2pp to 19.6% due to higher depreciation & amortisation, employee related expenses and one of expense of CHF 1.2mn related to Internaxx integration and others.

Valuation

We have revised our estimates upwards (exhibit 5), based on 1H2019 performance and the positive outlook shared by the company. The stable performance during the period demonstrated the execution of its growth strategy and provided investors with the conviction on the company's ability to grow consistently. As the result and guidance both were in line with our expectations, hence, we have not revised our DCF based target price of CHF 64.1 per share. In addition, we have also kept our target price through relative valuation at the similar levels of CHF 64.7 per share (63.4 earlier) . The blended fair value of CHF 64.4 per share by giving equal weight to DCF and Relative Valuation, provides an upside of 49.9% from the current trading level. Hence, we believe the current price level at which Swissquote is trading offers an attractive opportunity to enter.