Tempel schreef op 6 april 2020 17:53:
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Flow Traders: Q1 Estimate Shows Healthy Revenues In These Circumstances
Includes: SPY, TLT, VGK, VIRT
Summary
Flow Traders is a liquidity provider which benefits from current record-high market volatility.
My model anticipated EPS of €2.09 for Q1. Assuming that volatility will stay average (VIX around 20) for the rest of 2020, annual EPS north of €4 could be reached.
Virtu Financial's primarily results indicate that liquidity providers indeed are earning a lot of money in these circumstances.
Flow Traders should be valued at least at €35/share, 18% higher than today. Consequently, I would recommend to hold your position.
Flow Traders (OTCPK:FLTDF) is a very interesting Dutch-based liquidity provider, which generates money by pricing Exchange Trade Product's ("ETPs") and quoting bid-ask spreads.
In a recent article I thoroughly analysed the company's business model and rated the stock a BUY given the discrepancy between record-high volatility and the depressed stock price. Since my purchase at €22, the stock gained 33% as anticipated. My €37 target price was based on estimations from my regression model. As volatility kept being high and there were 12 more trading days to go when the article was published, I now want to give an update on this model. What are my net trading income ("NTI") and EPS expectations for Q1 2020 based on my model? Moreover, I will analyse Virtu Financial's (VIRT) recent primarily quarterly results and use it in my expectations.
Q1 2020 estimations based on regression model
Recently, I created a multivariate regression model, based on several variables related to volatility and ETF's, trying to predict Flow Traders' NTI. My final model includes five independent variables which try to predict the NTI:
Volume SPY average of highest 10: the 10 days with the highest volume during the quarter for the SPY index (American ETF).
VGK intraday average of highest 10: the 10 days with the highest intra-day % change during the quarter for the VGK index (European ETF).
TLT intraday average of highest 10: the 10 days with the highest intra-day % change during the quarter for the TLT index (20-year bond ETF).
VGK Volume average: the average volume of the VGK index during the quarter.
VIX close average: the average closing price of the volatility index during the quarter.
Interestingly, all these variables were significantly higher compared to their average over the past five years, as shown in the graph below.The VIX averaged 30.86 in Q1, 105% higher than on average. The VGK daily volume averaged 4.2 mln shares, 40% higher than over the past five years. The highest 10 daily volumes of the SPY last quarter averaged 117% higher compared to the past 19 quarters. Also, there were many intra-day swings in ETF's during this quarter, which should have a strong positive impact on Flow Traders' NTI. The 10 highest intra-day changes of the VGK and TLT indices last quarter averaged respectively 281% and 432% higher compared to the values over the past 19 quarters.
(Source: Robbe Delaet based on Finance Yahoo data)
These high volatility and volume parameters should result in a much higher NTI compared to the last quarters. As shown below, my model predicts that Flow Traders has earned €197.33 mln in NTI during Q1 2020. This would approach the highest quarterly NTI since its IPO.Moreover, we are 90% sure that the NTI will lie between €122.83 mln and €271.83 mln, which I will use as bear and bull case.While the predictions have been very close to the reality so far (difference blue and red line), it is important to note that this quarter was very extreme, which could lead to an NTI which deviates significantly from these estimations.
(Source: Robbe Delaet with Gretl software)
In the next table, you find my EPS predictions for Q1 2020. These estimates include the following assumtions:
NTI based on the regression model.
Management guided that fixed expenses are expected to grow by 10% maximally in 2020. For Q1, I expect these expenses to grow by 16% YoY and that this YoY growth will slow down through the year.
For the variable employee expenses as % of NTI I used the 2018 number, which was 24.23%.
Tax rate of 18.7%, similar to 2019.
(Source: Robbe Delaet estimations)
As such, I expect Flow Traders to report quarterly EPS of €2.09 in my base case scenario. This is significantly higher than the average analyst estimate of €1.45. If you assume average quarterly results during the rest of 2020 (which is pretty conservative given the current turmoil) similar to the Q4 2018 results, this would lead to annual EPS of €4.33.
Q1 2020 estimated based on Virtu Financials' primarily results
Flow Traders' peer, Virtu financial posted two quarterly updates recently, which can be very informative to predict earnings:
Investor takeaway
Flow Traders is a liquidity provider which earns significantly more money in volatile market circumstances. Due to the covid-19 crisis, the VIX spiked to its highest level ever recorded. Consequently, my model estimates that Q1 2020 NTI will be approximately €197 mln which would lead to EPS of €2.09.Flow Traders is a great stock to hedge your portfolio against further market uncertainties. Although I already made 33% gains in less than one month on my position, I believe it could be interesting to hold the stock longer.As explained, if volatility stays average for the rest of 2020, EPS could go above €4. I believe that a stock price of €35 is more than justified given the current market circumstances. Also, Flow Traders tends to pay out more than 70% of its EPS in dividends.