EUR 900.00 For Business Accounts Only

XTB - BUY - What does not kill you... - Coverage Initiation IPOPEMA 18.05.2018

What does not kill you…
…makes you stronger. We initiate coverage of XTB with a BUY recommendation and
a fair value of PLN 9.30 per share, which implies 62% upside potential.
ESMA regulations to affect short-term profits, may speed up M&A in the future
The European Securities and Markets Authority recently published measures to be
adopted towards contracts for difference (CFDs). We assume this will lead to a
temporary decline in clients’ traded volumes and therefore expect the new measures
to affect profits of the entire FX broker industry over the short term. Weaker players
are already struggling with low profitability and could ultimately decide to exit the
business or perhaps are already looking for exit options. This situation will create
opportunities for more efficient players with stronger balance sheets (such as XTB),
for M&As or at least the taking over of some client bases.
XTB has enjoyed a strong start to the year, with net profit at a stunning PLN 59.5m in
1Q18. However, we expect some moderation in 2H18, with the full impact of the new
ESMA regulations becoming visible in 2019. We forecast XTB’s net profit at
PLN 109.3m for full-year 2018E (which we see as a conservative assumption given
the 1Q18 figures), before dropping to a cyclical low for the company of PLN 77m in
2019. In subsequent years we expect profits to start rising again.
Strong capital position allows rich dividend payments
After the retention of the entire 2017 profit, we expect XTB’s capital ratios to be well
above the levels required by the regulator. As of end-2018, we expect the company
to have a capital surplus of PLN 142m (or PLN 1.21 per share), which could
potentially be paid out as dividends or spent on M&As. We assume XTB will recoup
its dividend capacity by improving its supervisory assessment, undertaken by the
regulator and known as BION. We expect the full sharing of 2018 and 2019 profits
(implying a DPS of PLN 0.93 and PLN 0.66 respectively) before a normalization to
75% payouts in the subsequent years. Dividend yields will reach 16.2% in 2019 and
11.4% in 2020 on our estimates.
Low valuation metrics already reflect the risk of short-term profit deterioration
XTB trades at a single-digit P/E ratio for 2018, which in our view reflects not only the
potential deterioration of short-term profits, but also the weakness of Polish small-cap
stocks in general. We believe this has created an opportunity for a decent return
once XTB gradually rebuilds its earnings after the new regulations have been
implemented and the mood on smaller Polish stocks improves. Although the
company does not have a broad peer group, we estimate it trades at a 43% discount
to four selected global players on P/E ratios for 2018 and a 21-29% discount for
2019-20. XTB offers attractive 2019-2020 dividend yields versus 4.3-4.7% for peers.