Digital Structuring And Recurring Fee Income Will Drive Strong Long Term Earnings Potential

Catalysts

About Leonteq

Leonteq is a specialist provider of structured investment solutions and pension-related products, combining derivatives expertise with proprietary technology and multi-issuer distribution.

What are the underlying business or industry changes driving this perspective?

• Accelerating client adoption of actively managed certificates and quantitative index solutions, supported by Leonteq’s new generation AMC offering and scalable QIS platform, is set to deepen recurring fee income and reduce reliance on volatile large-ticket deals, which may lift revenue visibility and support higher, more stable earnings.
• The industry wide shift toward digital, real time structuring and execution plays directly into the strengths of the LYNQS platform. This enables Leonteq to roll out low marginal cost distribution in new markets and capture incremental volumes that could expand top line growth faster than operating expenses, potentially improving net margins.
• Ongoing diversification of issuer partnerships and the move toward distributing third party products such as private equity and external quantitative strategies allow Leonteq to monetize its broad intermediary network with lower capital intensity, which may enhance fee based revenue while supporting return on tangible equity.
• The continued build out of retail flow activities across Swiss and European exchanges, combined with growing demand from self directed investors for structured solutions, may steadily increase turnover in own issued products and retail flow fees. This could lead to higher trading income and operating leverage in earnings.
• Implementation of the FRTB based capital framework, combined with cost efficient nearshoring to Lisbon and the planned resizing of underperforming units, is expected to unlock RWA and cost savings that can be redeployed into higher growth franchises. This would be consistent with the targeted CHF 60 million to CHF 80 million profit before tax and could support stronger net margins.

Assumptions

This narrative explores a more optimistic perspective on Leonteq compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Leonteq's revenue will grow by 16.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.3% today to 21.7% in 3 years time.
• The bullish analysts expect earnings to reach CHF 78.0 million (and earnings per share of CHF 4.32) by about December 2028, up from CHF -619.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, up from -391.3x today. This future PE is lower than the current PE for the GB Capital Markets industry at 17.4x.
• The bullish analysts expect the number of shares outstanding to grow by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural fee pressure in the global structured products industry, driven by rising competition, electronic pricing and clients shifting toward lower margin yield enhancement products, may continue to erode Leonteq's fee margins beyond the recent decline from 67 basis points to 57 basis points, weighing on revenue and constraining earnings growth over time.
• Persistent uncertainty and potential setbacks around legacy compliance matters and regulatory changes such as the transition from the simplified standardized approach to the FRTB based regime could dampen client activity and large ticket transactions on a recurring basis, limiting net fee income and creating volatility in earnings despite a currently strong CET1 ratio.
• The strategic resizing and exit from underperforming initiatives and regions, including the sale of the Japanese entity, the wind down of the bench pension savings platform and aggressive nearshoring of up to 30% of non sales and non trading staff to Lisbon, may not fully translate into sustainable growth if client demand for remaining offerings disappoints, resulting in stagnant or declining revenue and pressure on net margins.
• Reliance on market volatility and trading performance, illustrated by the CHF 39.5 million net trading result boosted by an exceptional volatility spike in April, exposes Leonteq to the long term risk that calmer markets or adverse trading conditions could significantly reduce trading income, making it harder to achieve targeted profit before tax of CHF 60 million to CHF 80 million and a 10% return on tangible equity.
• The multi issuer and partner diversification strategy, including expansion into new white labeling and third party product relationships, may be challenged by shifting risk appetites, changing funding conditions and competitive offerings from larger banks, which could cap turnover growth with key partners and limit the scalability of recurring fee streams, ultimately constraining revenue and delaying improvements in earnings and capital generation.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Leonteq is CHF18.0, which represents up to two standard deviations above the consensus price target of CHF16.05. This valuation is based on what can be assumed as the expectations of Leonteq's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF18.0, and the most bearish reporting a price target of just CHF14.1.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CHF359.5 million, earnings will come to CHF78.0 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of CHF13.72, the analyst price target of CHF18.0 is 23.8% 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.