This report is published by Research Dynamics, an independent research boutique
Robust 1H 2018 results, growth in all areas and a very sensible strategic acquisition in the EU
Healthy 1st half 2018 numbers; positive outlook over the medium-term
The company posted impressive numbers for 1H2018 results, with net operating income increasing to CHF 120.9mn (up 35.8% y/y). Adjusted for unexpected events and negative interest rates, the operating income increased by 30.3% y/y to CHF 117.8mn. The growth was driven by robust performance across all business divisions, with net fee and commission income increasing by 42.8% y/y to CHF 55.6mn and net interest income up 89.6% y/y to CHF 11.4mn. Net trading income also increased by 22.3% y/y to CHF 54.0mn, whereas the adjusted net trading income was up 9% to CHF 46.8mn. As a result of the excellent set of half-year numbers, management increased its full-year guidance to a 15% growth rate for revenues and profit, from 10% previously.
At CHF 25.5bn, client assets rose 20.6% y/y, driven primarily by assets in trading accounts (22.2% y/y) as the number of trading accounts increased to 249,699 (+7.0% y/y) and also supported by Robo-Advisory (ePB) assets which grew 36.9% y/y to CHF 228.3mn. Net new money inflow came in at CHF 2.4bn. The total number of accounts grew by 6.3% y/y to 322,032 led by eForex accounts (13.5% y/y) and trading client accounts (7% y/y). All accounts witnessed significant growth, except savings accounts which decreased by 10.4% y/y to 26,968, mainly due to the negative interest rate environment.
Operating expenses increased to CHF 82.0mn (21.2% y/y), as Swissquote continued to invest in technology, marketing and employees. Employee related expenses rose to CHF 37.4mn (+22.6% y/y) with marketing expenses increasing by 16.6% y/y to CHF 11.9mnThe pre-tax profit margin jumped to 27.3% (+3.2pp y/y), while net profit rose by 43.9% to CHF 25.7mn and the corresponding margin improved 2.7pp to 22.8%.
Fee and commission income increased by 39.4% to CHF 61.1mn reflecting growth in brokerage and related income, which increased ~47% to CHF 46.6mn, supported by the inclusion of cryptocurrencies' trading revenue in the brokerage and related income and robust performance of white labels overseas (9% of total revenue). In 1H2018, Swissquote generated revenue of CHF 8mn from trading of cryptocurrencies led by 28.9% y/y growth in the volumes to CHF 1,157.5mn. The number of trading accounts increased by 7.0% y/y to 249,699 and the total trading client assets increased to CHF 24.5bn (up 22.2% y/y) with average assets per client coming at ~CHF 98K. In addition, the total number of transactions also increased by 10.1% sequentially to 1.4mn, which led the total transactions per client per year to 11.8, up 6.3% sequentially, for the first time since 2015.
Net interest income increased 89.6% y/y to CHF 11.4mn, despite the negative interest rate expenses in the first half of FY2018. However, the total cash deposit, subject to negative interest, has come down to CHF 780.9mn from CHF 881mn in FY2017. Consequently, costs related to the negative interest rate reduced to CHF 4.2mn from CHF 4.9mn in 1H2017. The primary reason behind a spike in net interest income was the growth in the income from derivative financial instruments, which increased to CHF 17.4mn from CHF 7.4mn in 1H2017.
Net trading income increased by 22.3% to CHF 53.9mn, primarily driven by higher revenue from eForex (eFX, currency trading with leverage) division, which was up 7.5% y/y to CHF 35.1mn, and also supported by income from derivative financial instruments of
CHF 7.1mn. Adjusted for unexpected events such as the sharp equity market sell-off and volatility spikes that occurred in early February 2018, the net trading income increased by 9% to CHF 46.8mn. Due to these events the company incurred a credit loss of CHF 8.2mn (which, under IFRS rules on hedge accounting, cannot be netted in the income statement and thus show up separately). However, the unexpected market developments and increased volatility also resulted in ~CHF 7.2mn in unexpected trading income which is ~87.3% of the total credit loss. So the net credit loss arising due to these one-off events amounts to ~CHF 1mn for the period. The total number of active clients in the eFX division increased 13.5% y/y to 42,986 with total assets almost flat y/y at CHF 328.6mn. On a sequential basis, the total volume for eFX remained flat at USD 594.4bn. However, Dollar per million (DPM) increased to USD 61.2, as compared to USD 60.1 in 2H2017.
Sustained investments in technology, providing an edge
The company is continuously focussing on innovation and technological advancement as part of its strategy. Swissquote introduced 9 new certificates under its newly launched thematic trading platforms during the first half of FY2018. These new certificates were instrumental in increasing the assets under management by CHF 10mn within thematic trading. In addition, the company launched a multi-currency credit card, enabling the holder to make transactions in 12 different currencies with no additional fee, also users will get a credit of up to 0.5-1.0% of their transaction value during the quarter to their respective accounts. We believe this should help the company to attract more clients leading to significant cross-selling opportunities going forward.
Internaxx Bank acquisition to provide reach across Europe
On 7 August 2018, Swissquote announced the planned acquisition of the Luxembourg-based Internaxx Bank. The purchase will be fully funded in cash (EUR 27.7mn, ~CHF 32.0mn), which the company has available on its balance sheet. The acquisition is a much needed strategic move as Brexit jeopardised Swissquote's plans to expand its business in Europe through London. Currently, Internaxx has a client base of 12,000 with EUR 2bn assets in custody and generated around EUR 10mn in revenue and EUR 1.4mn in profit for FY2017. We believe the full consolidation will occur as of the beginning of H2-2019 (due to the necessary regulatory approvals by the Luxembourg financial market authority) as we assume that due to the looming Brexit deadline in March 2019 the authorities might take longer to approve the acquisition.
Valuation
We have revised our estimates upwards (exhibit 5), based on the stronger than expected 1H2018 performance and positive outlook shared by the company. The robust performance during the period demonstrated the successful implementation of its growth strategy and provided the investors conviction on its ability to grow consistently. Consequently, we have revised our DCF based target price, upwards to CHF 84.2. In addition, through relative valuation we have arrived at a fair value of CHF 81.4 per share. The blended fair value of CHF 82.80 per share (earlier: CHF 71.00) giving equal weight given to DCF and Relative Valuation, provides an upside of 19.1% from the current level. Hence, we believe the current price level at which Swissquote is trading offers an attractive entry opportunity.
