EUR 850.00 For Business Accounts Only

Morningstar | As Expected, Cyclical Growth Is Slowing for Deutsche Boerse; Underlying Secular Growth Still Fine

Narrow-moat Deutsche Boerse's first-quarter 2019 results were generally in line with our overall thesis on the firm, and we do not plan to make any material changes to our EUR 107 fair value estimate. As expected, cyclical growth drivers have subsided, with cyclical net revenue down 1%, while secular net revenue growth met the 5% target for the quarter. Adjusted operating costs were down 2%, while adjusted EBITDA was up 9%. Overall, the company is meeting its medium-term goals, with adjusted earnings per share up 10%.

Eurex had an OK quarter. Net revenue was relatively flat, but cost savings helped lead to adjusted EBITDA growth of roughly 6%. Equity-related revenue did well, but fixed-income and index-related items saw more revenue and volume pressures in the quarter. Over-the-counter clearing growth has slowed, with EUR 9 million in related revenue during the quarter compared with EUR 8 million in the fourth quarter and EUR 7 million in the third. This is in contrast to revenue and notional outstanding growth, which previously was often over 100%. While uncertainty related to Brexit in general hasn’t gone away, some of the uncertainty related to European Union clearing has, and it appears that London Stock Exchange is poised to maintain its near monopoly in this space, regardless of the Brexit outcome.

EEX and 360T have continued their strong growth trajectories, with revenue at EEX up 19% year over year and revenue at 360T up 22%. Volumes for both segments continue to increase dramatically. The cash equities business remains tough, and Xetra revenue declined 5% as overall order volumes were generally down. Clearstream's revenue was up 6%, again almost entirely due to increasing net interest income. We would expect this cyclical tailwind to abate as rate increases all but cease in the U.S. in 2019. Finally, the IFS, GSF, STOXX, and data segments each saw net revenue up at a low- to mid-single-digit pace.

Also during the quarter, Deutsche Boerse announced the acquisition of Axioma, an asset-management software provider. The acquisition is for $850 million, which will give Deutsche Boerse a 78% stake in the firm. Deutsche Boerse has been building products with Axioma since 2011. Combining Axioma’s relationships with asset managers and technology abilities with Deutsche Boerse’s index business should allow for some cost savings as well as better product offerings, with most of the benefit from the acquisition expected to come from revenue synergies. Overall, we think the acquisition makes sense strategically, better positioning the firm in an environment that continues to shift from active to passive, and analytics around index products and strategies is becoming more important. It also adds a higher-growth segment into the mix, with growth in the double digits expected over the medium term.