Flow Traders Stock: Volatile return profile unattractive for long-term investors

Stream Merchants ( OTCPK:FLTLF ) is a specialty buying and selling firm based mostly in Europe, however its enterprise mannequin and unstable earnings profile do not appear to supply a lot worth to long-term traders proper now.

Enterprise overview

Stream Merchants is a European monetary companies firm specializing within the provision of liquidity to exchange-traded merchandise (ETP). It was based in 2004 and is predicated within the Netherlands, listed on the inventory alternate since 2015. Its shares are excellent at about 68% of its complete shares, and its shares are traded within the US over-the-counter market, whereas its present market worth is about $920 million, a comparatively small firm by these metrics.

The corporate is predicated in Amsterdam, however all through its historical past has expanded worldwide, at present having places of work within the Americas, Europe and Asia and using round 600 folks.

Stream Merchants works as a worldwide monetary markets buying and selling agency specializing in ETPs. It began out primarily in equities, however has expanded into mounted revenue, commodities, overseas alternate and, extra not too long ago, digital property. Its major position is to supply liquidity in these asset lessons to traders in all market circumstances, thus its enterprise is a mixture of brokerage and market maker.

Because of this its comparable firms embrace each brokerage companies and funding banks, as the corporate’s operations overlap with numerous gamers within the monetary companies trade.

Its buying and selling operations are based mostly on three hubs, specifically Amsterdam, Hong Kong and New York, with entry to greater than 180 commerce routes in roughly 40 nations. Stream Merchants gives liquidity to greater than 6,500 ETPs worldwide, each on and off-exchange, for institutional shoppers together with banks, asset managers, hedge funds, household places of work and others. Over-the-counter, it gives liquidity on a request-for-quote foundation for a number of asset lessons and derivatives, together with choices and futures.

As a liquidity supplier, Stream Merchants do not need directed market judgment and customarily don’t assume market threat. It trades by itself capital and doesn’t handle its shoppers’ property, present monetary recommendation and has no shopper shoppers. Furthermore, it doesn’t develop its personal merchandise, buying and selling ETPs from different suppliers resembling BlackRock (BLK) or Deutsche Financial institution (DB), for instance.

Thus, his buying and selling revenue doesn’t rely on the route of market costs, incomes earnings between the small value variations realized when shopping for and promoting associated property. Though this enterprise mannequin is just like brokerage companies, Stream Merchants makes its revenue primarily from buying and selling fairly than buying and selling charges, which suggests having the ability to supply superior execution is vital to the sustainability of its enterprise mannequin.

Its progress technique has centered primarily on natural progress by buying and selling extra merchandise and masking extra asset lessons, whereas it has additionally benefited from the expansion of AuM ETPs as extra traders have allotted capital to those merchandise over the previous few years. This technique is just not anticipated to vary a lot going ahead as Stream Merchants ought to proceed to concentrate on enhancing their buying and selling capabilities and gaining ETP market share.

As well as, the corporate has additionally created a enterprise capital initiative to speculate its personal capital in startups, monetary markets and the digital asset trade, which might doubtlessly enhance its future progress via innovation, displaying that its technique is clearly extra biased in direction of natural progress than acquisition. It goals to spend money on strategic minority investments in additional than 20 firms with an funding horizon of about 10 years to acquire extra income streams and additional broaden its actions into new markets and segments that ought to complement its core enterprise.

Monetary assessment

When it comes to monetary efficiency, though Stream Merchants has a constructive status over the previous decade, its monetary outcomes might be unstable yearly as a result of its enterprise tends to learn from durations of elevated volatility, resembling 2020 as a result of pandemic or 2022 as a consequence of earlier than the struggle in Ukraine and better than regular volatility of rates of interest.

Nonetheless, Stream Merchants has been capable of report increased internet buying and selling revenue (its most related measure to income) over the previous few years and report an EBITDA margin of round 50% over a number of market cycles. Its long-term goal is to realize an annual internet buying and selling revenue above €1 billion, a degree it was near in 2020 as a consequence of unusually excessive buying and selling exercise, however lately its internet buying and selling revenue has been effectively under its goal.

Certainly, in 2023 Stream Merchants’ complete income was €304 million, down 34% year-on-year as a consequence of considerably decrease consumer exercise because the capital markets confirmed much less volatility in comparison with the earlier 12 months. Its internet buying and selling revenue was €300 million, whereas different revenue was near €4 million, representing unrealized features from strategic investments in its enterprise capital division. Many of the income was generated in Europe, whereas the US and Asia had smaller contributions.

On the expense facet, its working bills elevated by 1.5% y/y to €178m, a comparatively good consequence given the general inflationary surroundings and wage pressures. Furthermore, the corporate continues to spend money on know-how. Due to this fact, its modest enhance in worth might be thought-about constructive given this background. However, Stream Merchants’ price base is essentially mounted and there aren’t any giant prices related to buying and selling actions, that means its profitability has declined considerably over the previous 12 months.

Certainly, its EBITDA was 67.5 million euros in 2023, down 62% year-on-year as a consequence of a mixture of decrease revenues and better prices. The EBITDA margin was simply 22%, in comparison with 39% the earlier 12 months, suggesting that the enterprise might be fairly cyclical and see giant swings in profitability over a comparatively quick time period. Its internet revenue was simply €59 million in 2023, a 60% year-on-year decline, with a internet revenue margin of 19.5%.

Though Stream Merchants is just not a financial institution or monetary establishment required to carry capital on a regulated foundation, there are some capital restrictions related to its enterprise mannequin. Prime brokers require the corporate to keep up a sure minimal degree of capital relative to market transactions, which is considerably of a capital requirement. Traditionally, Stream Merchants’ capital place has exceeded the necessities of prime brokers, which is a conservative place and permits for a good portion of annual earnings to not be retained.

Due to this conservative steadiness sheet place, Stream Merchants’ dividend coverage is to pay shareholders not less than 50% of annual earnings in two installments. Because the firm’s earnings are fairly unstable and the corporate doesn’t have a progressive dividend coverage, which means its annual dividend can be unstable and follows its earnings trajectory.

Certainly, its complete earnings-related dividend for 2023 was €0.45 per share, down 70% year-to-date, indicating that Stream Merchants dividends can fluctuate considerably from 12 months to 12 months. On the present share value, it presents a dividend yield of round 2.4%, which isn’t significantly spectacular within the European monetary sector.

Wanting forward, Stream Merchants is simply offering steerage associated to its working bills, that are anticipated to stay comparatively flat in 2024 in comparison with the earlier 12 months, as the corporate expects to cut back its overheads barely, however the financial savings needs to be offset by investments in applied sciences. On the income facet, that is largely out of administration’s management and fairly tough to forecast, so there isn’t any visibility on income and earnings progress over the following few years.

As for its valuation, on condition that Stream Merchants’ enterprise is sort of cyclical and its financials might be unstable, it is no shock that its inventory trades at a comparatively low valuation. Certainly, Stream Merchants at present trades at round 10 instances ahead earnings, which is an identical degree to its historic common over the previous 5 years, so its shares now seem like fairly valued.

Conclusion

Stream Merchants is a specialist buying and selling firm that gives liquidity for ETPs and different OTC merchandise, together with digital property, but it surely seems to be a distinct segment market section and the corporate’s long-term progress prospects will not be spectacular. Furthermore, its earnings profile is sort of unstable and future efficiency is scarce, so Stream Merchants doesn’t seem like a compelling play for long-term traders.

Editor’s be aware: This text discusses a number of securities that aren’t traded on a serious US alternate. Pay attention to the dangers related to these shares.