Microlector , el análisis es del año pasado pero la explicación de la situación competitiva de la empresa continua vigente.
The company derives more than half of its revenue from the most commoditized, lowest growth and most competitive segment of the industry, namely European cash equities trading.
The introduction of MiFid in 2007 opened European cash equities trading to competition from multilateral trading facilities (MTFs). The launch of MTFs marked the end of the cash equity trading monopolies.
Initially, the most immediate casualty was the London Stock Exchange. After capturing 10% share of trading volume in FTSE100 stocks, the MTFs gathered significant steam. LSE’s market share of trading volume in its own listed companies, declined from 90% to less than 60% in just 18 months. In order to avoid further deterioration the LSE eventually reduced its all-in trading prices by >50% and the market shares eventually stabilised around the 50%-60% levels. The same subsequently happened to the other European primary exchanges including Xetra and Euronext.
This deterioration in business quality, from monopoly status to commoditized businesses with relatively low barriers to entry, combined with the lack of growth in European cash equity volumes also caused investors to lower the earnings multiples awarded to cash equity trading houses.
There was one major exception to all this, namely BME. While all its European peers were suffering heavy market share losses and price compression.
In 2014, the all in average cost of equity trading on BME was 1.55bps, compared to 0.92, 0.74 and 0.64bps at Euronext, Xetra and LSE respectively. The average cost of a trade on BATS is just 0.15bps.
The company’s ability to fend off the MTFs and avoid the fate of its European peers is about to take a significant turn for the worse. The reason that MTFs have been unsuccessful in Spain is that there are some unique regulations around Spanish equities trading that act as a deterrent against trading away from the primary exchange. However, due to the need to comply with certain new European regulations, the country is in the process of implementing significant financial market reforms. Some of these reforms are already in place while others are going into effect on October 9th of 2015. The effect of the reforms already in place is clearly visible as BME’s market share of IBEX trading volume has already fallen to below 80% by the end of last year and has continued to deteriorate.
On October 9th those differences will be eliminated and MTFs will finally be able to compete on equal footing with BME. By then we expect BME’s market share losses to accelerate.
It is worthwhile noting that the effect on BME from MTF competition could end up being more severe than what other exchanges experienced because of the heavy concentration of Spanish trading volume. The key barrier to market share gains for an MTF is to build sufficient trading liquidity in a particular stock so that bid/ask spreads would be narrow enough. A wide bid/ask spread offsets any benefit a trader has from the lower price charged by the MTF. The extent to which the primary exchange has narrower spreads than the MTF dictates that extent to which it can charge higher prices. At BME, 3 stocks (SAN, BBVA, TEF) account for nearly half of the total volume on the exchange. This means that MTFs should be able to easily achieve narrow spreads in those key names which in turn will force BME to reduce prices further than simply getting to par with the other European exchanges. In addition, BME’s market share could decline further as well.
And there is new European regulation called Target2Securities (T2S) under which the settlement of cash equities in Europe is going to be outsourced to the ECB. When Spain joins T2S (scheduled for early 2017) BME will lose another €30m in revenue which given the fixed cost nature of the business will drop straight the bottom line, representing another 15% earnings headwind.
There are one more regulatory headwinds facing BME: Open Access:
New European regulations will allow market participants to choose where to clear any equities trade. Analysts currently expect BME’s newly launched clearing house to contribute positively to earnings, but once open access comes into force they may lose most of this revenue as clients choose to clear at a larger clearing house where they can optimise collateral efficiency
Even if we assume equity volumes continue their current cyclical recovery and BME’s market share and pricing does not decline further than what we saw at other European exchanges, we derive an earnings per share forecast of €1.5 for 2017. Applying an appropriate 13x multiple to this we get a stock price below €20
Y sobre una posible adquisición por parte de un competidor comenta:
We view this as only a remote possibility for a number of reasons. Buying BME at a premium would cost at least $4 billion so that only the larger exchange groups could even consider it and it so happens that none of these groups are currently interested in acquiring a European cash equities business. The best proof of that was the recent IPO of Euronext. ICE was desperately looking for a buyer, but there was none. Given that Euronext represented a far more interesting acquisition target because of its higher cost base (i.e. more synergy potential for the acquirer) and the fact that its earnings are already post the competitive onslaught form MTFs and yet there was no buyer, we believe that it is highly unlikely that a buyer will suddenly emerge for BME.
