Merger With Neurotech Will Provide Significant Tax Benefits Over Next 5 Years

Key Takeaways

• Growth in derivatives and crypto products, combined with fixed income innovations, positions B3 to boost revenue and capture market share in trading.
  
• Operational efficiency and share buybacks indicate potential improvements in margins and earnings, with mergers offering tax advantages and cash flow improvements.
  
• Rising interest rates, competition, and political volatility may challenge B3's market share and revenues, despite potential short-term trading volume boosts.

Catalysts

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

• The expected growth in listed derivatives and the introduction of new crypto futures and options products, such as Bitcoin, Ethereum, and Solana, could significantly boost B3's revenue by attracting more trading volume and diversifying product offerings.
  
• The continued expansion and innovation in the fixed income market, including the introduction of platforms like Trademate and plans to launch new products linked to fixed income indices, are likely to drive future revenue growth as B3 captures a larger market share in private credits.
  
• The operational efficiency and cost discipline demonstrated by B3, such as managing personnel and technology expenses below inflation, suggest potential improvement in net margins, enhancing overall earnings.
  
• B3's aggressive share buyback program, prioritizing buybacks over dividends due to current stock valuation, can lead to a significant increase in EPS as the company reduces its share count and possibly supports its stock price under current market conditions.
  
• The planned merger of Neurotech, along with the resulting tax benefits estimated at R$800 million over the next 5 years, is expected to enhance cash flow and potentially boost net profit margins by reducing tax expenses.

B3 - Brasil Bolsa Balcão Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming B3 - Brasil Bolsa Balcão's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 48.1% today to 50.3% in 3 years time.
• Analysts expect earnings to reach R$6.1 billion (and earnings per share of R$1.15) by about March 2028, up from R$4.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 13.9x today. This future PE is greater than the current PE for the BR Capital Markets industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 5.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.16%, as per the Simply Wall St company report.

B3 - Brasil Bolsa Balcão Future Earnings Per Share Growth

Risks

• The high level of interest rates in Brazil may continue throughout the year, potentially discouraging equity investments and affecting revenue from equities trading.
  
• B3's expenses may experience pressure from seasonal impacts, personnel changes, and revenue-linked costs, which could negatively affect net margins.
  
• Ongoing volatility due to political events in Brazil and globally, while boosting short-term trading volumes, could also result in instability and unpredictability in revenues.
  
• Potential competition from new exchanges with plans to launch in the near future may lead to increased competitive pressures, potentially impacting B3's market share and revenues.
  
• The incentives for trading Bitcoin Futures, which are cost-intensive, will expire, potentially leading to reduced volumes and trading revenues in the absence of these incentives.

Valuation

• The analysts have a consensus price target of R$13.736 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 2028, revenues will be R$12.2 billion, earnings will come to R$6.1 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 19.2%.
• Given the current share price of R$12.04, the analyst price target of R$13.74 is 12.3% 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.