EUR 850.00 For Business Accounts Only

Morningstar | More Steady Growth for Deutsche Boerse; Slightly Higher One-Time Charges Than Normal

Nothing in narrow-moat Deutsche Boerse's second-quarter results materially alters our long-term view of the firm. After some slight model adjustments, and because of the time value of money, we are increasing our fair value estimate to EUR 115 from EUR 109. Deutsche Boerse continued to perform in line with expectations. Net revenue was up 10% year over year, operating costs were up 7%, and net profit was up 13%, all on an adjusted basis. Xetra took a break this quarter, as increasing expenses limited what was otherwise decent trading volume growth. This quarter, once again, Eurex had strong performance as interest-rate and equity derivatives drove growth, and the firm’s new over-the-counter clearing initiative continues to gather steam. EEX and 360T also continued on their strong growth trajectories, which we have expected since they are still developing units. The Stoxx segment had a weaker quarter, where even with assets under management for Stoxx exchange-traded funds growing, licensing revenue still declined. The investment fund services segment continued its strong growth, and Clearstream turned in a steady quarter of 10% adjusted EBITDA growth, very much helped by increases in net interest income. Further rate increases in the U.S. should help this line a bit more over the medium term. Overall, 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 note that factoring in “exceptional items” causes EBITDA growth to fall to 5% from the 12% adjusted results. We have long talked about the seemingly consistent nature of Deutsche Boerse’s exceptional items year to year, and would expect more of the same in the future. In theory, some of these were related to mergers, acquisitions, and litigation, which should indeed be one-time in nature, and in the future we wouldn’t expect these exceptional expenses to be quite as high.

The firm disclosed the notional cleared for interest-rate swaps, an area where Deutsche is attempting to take share from the dominant force in this area, SwapClear of the London Stock Exchange. Total notional cleared for Deutsche Boerse during the quarter was EUR 3.8 trillion, up double digits from the 3.3 trillion in the first quarter. While we don’t have LSE’s quarterly results yet, based on current volume data available, SwapClear does not appear to have grown at this rate during the quarter, meaning Deutsche likely did gain some share. While we would point out that Deutsche Boerse’s share is still minuscule, and we believe the nature of this clearing market is to favor a monopoly, we like that Deutsche Boerse is moving in the right direction. 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.