EUR 850.00 For Business Accounts Only

Morningstar | Another Solid Quarter for Deutsche Boerse; Lowering Our FVE on Lower Longer-Term Growth Expectations

Narrow-moat Deutsche Boerse's third-quarter results were roughly in line with our overall thesis on the firm, and management reiterated full-year 2018 guidance. After some slight adjustments to our projections, primarily for growth estimates over the longer term, we are decreasing our fair value estimate to EUR 107 from EUR 115. Deutsche Boerse continued to perform in line with short-term expectations. Net revenue was up 13% year over year, operating costs were up 5%, and net profit was up 21%, all on an adjusted basis. This led to an increase in EBITDA of 19% year over year, as earnings per share increased 23% to EUR 1.30 per share.

Eurex had another strong performance as interest-rate and equity derivatives drove revenue growth, and the firm’s new over-the-counter clearing initiative continued to gather steam. Revenue was up 123% year over year for the OTC clearing segment. Eurex is on course to record another strong, double-digit growth year in 2018. EEX and 360T also continued on their strong growth trajectories, with revenue at 360T up 26% year over year, and revenue at EEX up 28%. Xetra’s growth had slowed for the quarter, but year-to-date results are still solid, with revenue up 7% as equity trading volumes and ETF/ETN volumes were up 20% and 15%, respectively. With adjusted EBITDA up double digits year to date for nearly every segment, Deutsche Boerse remains on track to meet guidance over the short term. Further rate increases in the U.S. should provide a further revenue boost over the medium term. The firm is meeting its growth goals of at least 5% (excluding cyclical factors) while holding expense growth below revenue growth (on an adjusted basis) to produce double-digit net income growth. We are cognizant of where we may be in the current market cycle and realize that a decline in volumes may occur over the next two to three years. As such, we would not be surprised if the current growth rates slow down at some point over the medium term.

Deutsche Boerse’s notional cleared for interest-rate swaps increased at a decent rate during the quarter, up to EUR 4.3 trillion from EUR 3.8 trillion last quarter. We note that this was a 13% quarter-over-quarter growth rate, slower than previous quarters, but still faster than the quarter-to-quarter growth we have seen for LSE’s IRS notional cleared via SwapClear. This means that Deutsche likely gained share again. Deutsche Boerse’s share is still small, but we like that Deutsche Boerse is moving in the right direction. We also wouldn’t be surprised if some of the share gains resulting from fellow German players, such as Deutsche Bank, are here to stay. If instability from Brexit can continue, it just might give the exchange a potentially once-in-a-generation opportunity to grab at least a piece of this market. However, we also worry that once the uncertainty abates, if the European market remains integrated with London in any reasonable way, LSE will retain its stable, near monopoly position.