FLATEXDEGIRO AG 
By 
In a like manner with the recent investments initiated in our portfolios, the group should benefit from the peculiar current economic environment, for market intermediaries record peak earnings during volatile periods.
Flatex got its start in 1997 as a BPO service provider for Bankenverband and E-Trade, developing full-scale IT infrastructure to support their brokerage operations. In 2005, it ventured on its own and received the "Best German online broker" distinction; a few years later, it secured a banking licence.
Headlines today are all about the takeover of DeGiro, the Dutch broker built upon the outstanding Interactive Brokers' infrastructure. On an enterprise value basis, the deal, funded by cash and the issuance of 7.5mil new shares at €25 per unit, values DeGiro at x4 revenue, x20 EBITDA and x25 net earnings.
The combined enterprise will weight €200mil in revenue, €50mil in EBITDA and €30mil in net income. The latter, by the way, may slightly overstate true earning power, as capital expenditures surpass actual amortization expenses — unlike Interactive Brokers, Flatex capitalizes a large part of its technology investments.
Still, the German group will count among the top European contenders — along with SaxoBank, E-Toro or IB — as they rush toward scale. The bet is on individual transaction processing cost to decrease as the volume of orders increase, transforming otherwise low-margin commodity businesses into a moat-like service providers.
Expected completion of the merger is expected for Q2 2020. 27mil shares will be outstanding, vs. 20mil today. Current market price of €28 per share thus values the combined entreprise at €756mil. Since there will be no debt or cash in excess, the combined enterprise carries a similar price tag with standalone DeGiro, despite a much larger scale and scope of operations.
In effect, the combination will create the largest pan-European retail broker, serving 780,000 customers and sporting a 25% market share in Germany, 40% in Austria and 35% in The Netherlands. Trading flow will hit €200bn annually vs. €150bn today, and synergies at the infrastructure level should exceed €30mil.
Mid term management's ambitions are to drive revenue to €300mil and earnings up to €3 per share. Albeit no timeline was disclosed, a share price expansion will inevitably occur if this scenario comes to fruition. Superior execution at Flatex since the early days and superb mindshare across Europe at DeGiro give valid reasons to hope. Both brands carry pristine franchise value.
The huge amounts of money invested over the years in technology allow for a substantial competitive advantage. Few rivals can come close to charging Flatex's prices and earn a profit, for they lack the scale and automated infrastructure. Unless its service deteriorates to a dramatic extent, overtaking the incumbent low-cost provider will remain a suicide mission.
Another feature of the merger is the strong joint client growth rate of over 200,000 clients (at least in FY2019). The two groups maintain impressive organic client growth rate, above 30%. Low fees, a comprehensive product range — stocks, bonds, ETFs, funds, derivatives, FX, etc. — and access to 50 exchanges should lay the ground for continuous success.
Analysts — whose consensus is probed in real-time by MarketScreener — think no less, as they've just lifted their estimates and price targets for the years to come. This is exactly the momentum we were expecting to add the stock to our European portfolio.
Absent failed execution, which may always happen, the main risk lies in the poor visibility of liabilities and actual financing standing — as with all brokers. However, Flatex looks well-capitalized in every respect, while its banking licence — which means the group must comply to stringent capital ratios — provides relative safety.
