flatexDEGIRO: Earnings Rebound Supports Long-Term Growth Story (OTCPK:FNNTF)

flatexDEGIRO (OTCPK:FNNTF) has reported positive earnings growth in the first quarter of the year, showing positive operating trends after a slowdown during the past couple of years. Despite that, its shares continue to trade at a relatively undemanding valuation, making it a good growth play in the European financial sector.

As I’ve covered in previous articles, flatexDEGIRO is an interesting growth play in the European financial sector, offering some good growth prospects and a discounted valuation to peers. Since my last article back in September 2023, its shares are up by more than 60%, clearly outperforming the German market during the same period.

Following this strong share price run, I think it’s now a good time to revisit its investment case and analyze its most recent financial performance, to see if it still offers value for long-term investors or not.

Earnings Analysis

flatexDEGIRO has reported recently its earnings related to Q1 2024, which were quite positive and above expectations.

Its revenues in the last quarter amounted to €123 million, an increase of 25% YoY, and up by 23% from the previous quarter. While customer activity has remained relatively subdued, flatexDEGIRO was able to increase revenues both from higher commission income (+10% YoY) and net interest income (+65% YoY), supported by higher transactions commissions and customer growth.

During the last quarter, its gross customer addictions were about 121,000, boosted by strong capital markets and being the best performance in recent quarters, as shown in the next graph. Moreover, the company continued to receive positive net inflows from its customers, amounting to €1.8 billion (+4% YoY) in Q1 2024, leading to a new record high of assets under custody (€58 billion).

While trading activity from retail investors remains relatively weak compared to the pandemic period, flatexDEGIRO is reporting strong growth figures, which is encouraging for its business prospects ahead.

Beyond customer growth and higher commissions, another positive factor for its earnings growth has been lower customer acquisition costs. Indeed, flatexDEGIRO has reduced its marketing costs in a significant way and is expected to cut even further over the coming quarters when its sponsorship of two European football clubs ends, which explain why its customer acquisition costs declined by 38% in the last quarter.

Despite these lower marketing expenses, the company was able to increase its customers by a strong rate, showing that flatexDEGIRO is a competitive player in the industry, from offering relatively low transaction costs, a user-friendly trading platform, and by having a banking license which is quite rare in the brokerage industry in Europe.

Investors should note that despite flatexDEGIRO having a banking license in Germany, it does not offer interest to customers. Thus, its customer growth is not related to offering higher rates than other banks in time deposits, as customer’s inflows are all related to trading and investment purposes activity and not related to savings products.

This explains why the company’s interest income has increased by 65% YoY in Q1 2024 to €44 million, as flatexDEGIRO benefits of higher interest rates in the interbank market. At the end of last March, customers had about €3.6 billion in cash, which the company can invest at very short maturities and earn interest, plus making margin loans at relatively high rates (about 7% currently).

flatexDEGIRO uses about €1 billion of customer’s cash to fund its margin loans, while the remaining is applied overnight in the German central bank. Given that the overnight rate (a time deposit for one day) is close to 4% in Europe, this means flatexDEGIRO can earn more than €100 million per year just by applying customer’s cash balances in the overnight market.

However, it’s quite likely that the European Central bank will cut interest rates in the coming months, thus flatexDEGIRO’s interest income is likely to have reached a peak and may come down slightly over the next few quarters.

Regarding commission income, its major source of revenues, flatexDEGIRO decided back in May 2023 to raise transaction costs, a move that could have a negative impact on transaction volumes. However, despite higher commissions, flatexDEGIRO’s settled transactions were almost unchanged in Q1 2024 compared to the same quarter of 2023, showing that its pricing is still competitive and investors have not left for other brokers.

Due to this increase in trading commissions, flatexDEGIRO’s average commission per trade increased by 12% YoY to €4.64 per transaction, being the major driver of its commission income growth in the quarter (+10% YoY).

Regarding expenses, the company made some efforts to cut costs in recent quarter, even though the inflationary environment has been negative because it led to higher staff costs. In Q1 2024, its marketing costs decreased by 33% YoY to €11 million, but personal expenses increased by 15.8% YoY to €24.9 million in the first quarter. On the other hand, cost related to long-term personal compensation declined by 87% YoY, to just €1.4 million. Overall, its total operating expenses were €50.5 million in Q1, representing a decline of 19% from the same quarter of the previous year.

Due to the combination of strong revenue growth and lower expenses, flatexDEGIRO’s profitability had a strong improvement, with EBITDA up by 177% to €54 million in Q1 2024. Its EBITDA margin was 43.6% (vs. 19.7% in Q1 2023), while its net income improved to €30 million in the last quarter (vs. €7 million one year ago).

For the full year, flatexDEGIRO’s guidance is to grow revenues between 5-15% YoY and its net income should be up by between 25-50% compared to the previous year, which means the company expects its positive operating momentum to last during the next few quarters.

Regarding its past regulatory issues, this seems to be practically fixed and further actions are not expected in the coming quarters. This means its regulatory capital is not expected to be increased in the future and therefore the company has now a strong excess capital position.

Indeed, its CET1 capital ratio was above 27% at the end of 2023, while its capital requirement was only 15.4%. Due to this strong capital position, the company has announced a share buyback of 10% of its shares to be authorized at its upcoming shareholders Annual General Meeting, to be completed over the next five years. Despite this long timeframe authorization, flatexDEGIRO expects to perform the share buyback much faster, which will be a positive support for its share price. Not surprisingly, its shares reacted quite well to this announcement, up by more than 20% on the earnings day.

Going forward, according to analyst’s estimates, flatexDEGIRO is expected to maintain a solid growth path, given that its revenues are expected to grow at about 7% annually from 2025-27, and its net income is expected to grow at about 10% per year during the same period.

Conclusion

flatexDEGIRO has reported a very positive operating performance in the first quarter of the year, showing that its business has strong fundamentals, boding well for growth ahead. Despite that, its shares are currently trading at 12x forward earnings, which is lower than its historical average over the past five years of about 14x, and also a discount to its closest peers, remaining therefore an interesting growth play in the European financial sector.

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