Bitcoin Futures And OTC Market Expansion Will Boost Brazil's Financial Markets

Key Takeaways

• Diversification and new products like Bitcoin futures have driven significant growth in non-cyclical revenue streams and enhanced market volumes.
  
• Strategic expense management and shareholder-focused actions, including buybacks, are expected to improve net margins and investor value.
  
• B3 faces revenue growth pressure from reduced cash equities, rising competition, regulatory risks, and potential inefficiencies impacting net margins.

Catalysts

A financial market infrastructure company, provides trading services in an exchange and OTC environment.

• B3's diversification strategy has resulted in significant revenue growth from non-cyclical segments, such as listed derivatives and data services, positioning the company for consistent future revenue growth.
  
• New product offerings, including the successful launch of Bitcoin futures, demonstrate B3's capability to generate innovative revenue streams and enhance volumes and revenues in the derivatives market.
  
• The hot corporate credit environment in Brazil and rising interest rates are expected to bolster the OTC market, resulting in increased revenue from bank funding instruments and corporate debt over the next quarters.
  
• Cost control measures and strategic expense management, especially related to operating expenses, have been implemented to ensure growth in expenses remains in line with inflation, positively impacting net margins over time.
  
• Continued focus on share buybacks and substantial distributions to shareholders have effectively reduced the float, potentially increasing earnings per share (EPS) and providing further value to investors.

B3 - Brasil Bolsa Balcão Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming B3 - Brasil Bolsa Balcão's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 46.1% today to 49.9% in 3 years time.
• Analysts expect earnings to reach R$6.0 billion (and earnings per share of R$1.15) by about December 2027, up from R$4.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2027 earnings, up from 12.3x today. This future PE is lower than the current PE for the BR Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 1.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.17%, as per the Simply Wall St company report.

B3 - Brasil Bolsa Balcão Future Earnings Per Share Growth

Risks

• A significant reduction in the share of revenue from cash equities (down to 21% in 3Q '24 from 37% in a prior pandemic high) indicates potential vulnerability to changes in revenue composition, which may pressure overall revenue growth if the diversification strategy faces challenges.
  
• Listed derivatives revenues could be negatively impacted by reduced market volatility or changes in interest rates that lower trading volumes, which might affect B3's revenue growth trajectory.
  
• Rising competition from new market entrants, as discussed, could intensify in coming years and capture market share from B3, potentially affecting its revenue streams and market position.
  
• Any adverse regulatory changes, particularly regarding the internalization of orders, might disrupt current business models or revenue streams, impacting overall earnings.
  
• Growing expenses, even controlled, could outpace revenue growth if new product lines don't perform as expected or if operational efficiencies are not realized, potentially squeezing net margins.

Valuation

• The analysts have a consensus price target of R$13.79 for B3 - Brasil Bolsa Balcão based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$16.0, and the most bearish reporting a price target of just R$11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$11.9 billion, earnings will come to R$6.0 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 19.2%.
• Given the current share price of R$9.86, the analyst's price target of R$13.79 is 28.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.