Buying opportunity, Target Price SEK 400March 9, 2017
Avanza is pursuing a high growth strategy through price & simplicity leadership in the do-it-yourself (DIY) brokerage market in Sweden. This is a highly demanding premise given consumer’s low switching costs, demand for advanced multichannel services, price transparency and quality customer service.
– The reward is that growth hardly ties up any capital. Successful players can maintain massive payout ratios and still grow in the double digits – like Avanza has done for almost two decades. Our base case is that Avanza reaches its target of one million customers in 2020, and we recommend to BUY the share based on the economy of access and monetization opportunities this sort of customer base will offer, says Beringer Finance analyst Ulrik Årdal Zurcher.
Avanza’s share price fell last Friday, when Nordea announced that they will substantially lower their brokerage fees for mass-market retail and start offering external funds. Beringer Finance believes this presents a buying opportunity as: (i) the Avanza vs. Nordnet rivalry shows it is not all about price, (ii) the bear argument that Avanza charges on average 10bps vs. Nordea’s current 6bps is a vast simplification, and (iii) we believe Nordea is likely losing money on trading at its new fee levels, while Avanza has the flexibility to further lower its price list based on its superior cost structure.
Nevertheless, there are some significant risks at play. Revenue per customer will drop initially when you plan to double your customer base over four years (the plan is likely to get the customer in the door and looking at higher margin products later on). There is a pressure on trading fees and this drift can be more severe than we estimate (although Avanza is the principal driver of this drift itself), and Avanza trades at very high multiples, which is supported by a ‘dividend yield safety mechanism’ – yet a weakening market sentiment will directly affect the company’s earnings and dividend capacity, resulting in a potential double whammy (multiple compression and lower earnings). Sweden will also implement some sort of Financial Activity Tax that we have not included in our estimates, as we are uncertain about how it will be structured (politicians are currently flip-flopping).
Lastly, we want to float an interesting nugget: would it not make a lot of sense for a major Nordic FIG to acquire Avanza? They would be able to serve their existing retail customers better (Avanza’s platform is the best in the Nordics and highly scalable), the cross-selling potential must be substantial, and implementing Avanza’s cost structure would save them OPEX. Additionally, it would remove an annoying competitor that is stealing market shares.
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