By Nandini Sukumar
Feb. 25 (Bloomberg) -- Deutsche Boerse AG, Europe’s largest exchange by market value, said costs in 2009 will be lower than it had anticipated as the company seeks to sustain growth amid falling trading volumes. The stock jumped as much as 9.5 percent.
Deutsche Boerse said expenses will be no higher than the 1.28 billion euros ($1.65 billion) it spent last year. The Frankfurt-based company had forecast an increase of about 5 percent. The exchange will pay a dividend from 2008 profit of about 2.10 euros a share, the same as a year earlier, and said it will update shareholders on its buyback plans in a few months.
The bourse reported yesterday after markets closed that fourth-quarter profit fell 18 percent from a year earlier, when earnings were boosted by the sale of real estate. Net income was 222.4 million euros, beating the 206.6 million euros median forecast of seven analysts surveyed by Bloomberg.
“The cost guidance is pretty positive,” said Richard Perrott, exchange analyst at Sanford C. Bernstein & Co. in London, who this week predicted a lower cost estimate, no buybacks and an unchanged dividend. “We are glad to see the conservatism on the capital-return program and the cost. And the fourth quarter was excellent.”
Perrott said the exchange could cut costs by trimming staff expenses, reducing stock-based compensation and “ratcheting up” an existing drive to reduce expenses.
Cutting Costs
Deutsche Boerse has been trying to cut costs since the end of 2007. The company is moving its Frankfurt office to the neighboring town of Eschborn and has plans to save 100 million euros a year starting in 2010 after reorganizing its business and cutting jobs. The exchange also sold its Clearstream unit’s Luxembourg offices, boosting 2007 earnings by 120 million euros.
“The story is the costs and capital management,” said Mamoun Tazi, exchange analyst at MF Global Securities Ltd. in London. “The outlook is negative for the industry, but they are doing better than others.”
The exchange cut its cost guidance by about 70 million euros for 2009, Chief Financial Officer Thomas Eichelmann said at a press conference in Frankfurt today. The company has about 200 million euros of “discretionary items that management can influence in the short term,” he said, adding that the bourse has instituted a qualified hiring freeze, is scrutinizing its travel budget more closely and plans to cut “staff and non-staff costs.”
Cheap Valuations
Deutsche Boerse and rivals London Stock Exchange Group Plc and NYSE Euronext are trading at the cheapest levels ever compared with profits as trading slumps in the worst start to a year for equities on record and electronic-trading platforms eat into market share.
Earnings per share at Deutsche Boerse and LSE may drop more than 20 percent this year, according to Sanford C. Bernstein. Revenue from electronic trading may fall more than 50 percent.
“Since the beginning of the year we see a reluctance to trade securities and derivatives,” Reto Francioni, chief executive officer of Deutsche Boerse, said in yesterday’s statement. “We are expecting a challenging year, 2009, which will require our full strength.”
Deutsche Boerse trades at 6.4 times profit, the cheapest on a weekly basis since going public in 2001, after the company’s shares slumped 69 percent in the past year.
The company has a stake in Eurex, Europe’s largest futures market, bought New York-based International Securities Exchange Holdings Inc. in 2007, and also owns Clearstream, the region’s No. 2 securities-settlement company and its own clearing unit.
‘Impossible’
“A forecast for 2009 is burdened by uncertainties,” Francioni said at today’s press briefing. “This makes it impossible to provide reliable earnings forecasts at the moment. We don’t expect any new records in 2009.”
Earnings before interest, tax and amortization fell to 322.5 million euros in the fourth quarter from 355.5 million euros a year earlier. That beat the 320 million euros median forecast of seven analysts surveyed by Bloomberg. Sales revenue rose to 609 million euros from 537.7 million euros in the quarter.
The Clearstream settlement unit pushed Deutsche Boerse’s earnings above estimates, according to Perrott and Tazi. Fourth- quarter Ebita at Clearstream rose to 118.1 million euros from 67.4 million euros in 2007.
“New cost guidance should be received well, and adds to our fundamental positive view,” Daniel Garrod, an analyst at Citigroup Inc. in London, wrote in a note to clients. “Deutsche Boerse has an attractive bias of business to derivatives and post trade and away from cash equities. Tax reductions are coming through and this is one of few financials still with stock buy back power.” Garrod reiterated his “buy” recommendation.
New Rivals
Deutsche Boerse, LSE and NYSE Euronext have faced a barrage of new rivals including Turquoise and Chi-X Europe Ltd., backed by investment banks, and European ventures of Bats Trading Inc. and Nasdaq OMX Group Inc.. The new entrants have taken business away, in part by offering cheaper trading of stocks listed on the primary markets.
The operator of the Frankfurt bourse in December said it explored a merger with NYSE Euronext.
The turmoil in the market “makes it all the more our duty as a company to explore the potential in this market environment for potential mergers and acquisitions on an ongoing basis,” Francioni said at the press conference today. “However, in so doing we also have to realize that the new valuation levels will not be accepted by all parties.”
Deutsche Boerse shares climbed as much as 3.41 euros, or 9.5 percent, to 39.37 euros and traded at 38.52 euros as of 11:37 a.m. in Frankfurt.
To contact the reporter on this story: Nandini Sukumar in Frankfurt at nsukumar@bloomberg.net.
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