Budapest Stock Exchange (Budapesti Értéktozsde): Probably cheapest monopoly stock exchange business in the world

[Killer022]

Budapest Stock Exchange (Budapesti Értéktozsde)

BET:BUX

Idea: Probably cheapest monopoly stock exchange business in the world

Market cap: 36,4 million EUR (13.800 mFT)

P/B = 0,77

P/E = 2,94

 

Business:

BET is a stock exchange of Hungary firstly established in 1864 during Habsburg monarchy and last time re-established in 1990 after fall of communism in eastern Europe. Even if often mentioned, because of its autocratic government of Viktor Orban, Hungary is a modern country in Eastern Europe, member of EU, NATO and schengen area.

Exchange was not listed since its re-estalishment in 1990 until now. In June 2023 shares of BET were firstly listed on its own exchange (they lost around 20% since then). They are thinly traded, but quite liquid (few thousand shares daily), available throught Interactive Brokers (which founder and CEO is originally from Hungary accidentally).

Stock exchanges are a solid businesses. On the one hand, heavily regulated by state, on the other hand in most cases they enjoy local monopolies. They are capital light, low or no debt, high margin businesses. Historically very stable businesses now getting a new (hopefully long-term) tailwind in form of higher interest rates.

Let´s do some valuation.

 

Valuation:

There are 5,413,481 shares listed with actual market value of 2550 Forint, which makes up a market value of 13,804 mil.forint , estimately 36,4 million EUR.

81,35 % of shares are owned by National Bank, which publicly announced it has an interest to lower its ownership below 50% in near term, which could raise liquidity of trading and also credibility (more space for activism ). The rest of shareholders list:

KBC Securities  5,2%

Concorde Értékpapír Zrt. 4,1%

OTP Bank Nyrt. 2,8%

Erste Bank Hungary Zrt. 2,3%

Mol Nyrt. 2,2%

Other 2,0%

Practically, as outside shareholders we have to fit in these last 2%, till National Bank will sell part of its shares.

The point of valuation is 46,67% ownership in Keler Group (rest is owned by National Bank), which consist of Keler and Keler CCP. They are doing clearing, settlement and depository services, and are the most valuable and profitable component of BET.

I put together a table below. I used a public websites of BET, Keller and Keller CCP. You can find there surprisingly a lot of information in English. Only last half year report of 2023 was published in hungarian language.

As you can see, there is needed some more digging to find out the true values. Main problem is double reporting under Hungarian laws and IFRS. This make a lot of noise there. I am not an accounting expert, so i used my common sense and derived Keler subsidiaries values directly from Keller reports.

 

	2018	2019	2020	2021	2022	TTM 6/22-6/23
Accounting Book value	13912	14183	15085	16459	15730	17828
Cash of BET	1370	2713	2450	3467	3954	4070
Share of equity of Keler Group	16424	15245	15989	16841	20675
BET revenue	2555	2765	2923	3056	3665	3687
Share of Keler income (A)	685	481	497	747	794	3764
Share of Keler CCP income (B)	81	205	245	189	1650
Net income without Keler (C)	-45	-441	115	477	1292	920
Total income(A+B+C)	721	245	857	1413	3736	4684
Accounting income	701	271	852	1377	-226	4128

·        All numbers in million forint

 

Income valuation:

BET own business without Keler is not so profitable, however significantly improving since 2018.

	2018	2019	2020	2021	2022	TTM 6/22-6/23
BET revenue	2555	2765	2923	3056	3665	3687
Net income without Keler (C)	-45	-441	115	477	1292	920

·        All numbers in million forint

If there would not be any Keler at all, at actual market cap, BET would trade at 15 P/E or 10 P/E ex cash. As seen, the exchange business is gradually getting better. There are many initiatives to make trading and listing more popular in Hungary. There are programs for funding smaller companies before moving to main exchange. The point is to diversify composition of securities traded on exchange (nowadays almost all the trading is done in 3 blue chip stocks).

Now it gets interesting. BET owns 46,67% of Keler and Keler CCP (Keler owns almost 100% of Keler CCP)

Keler is a profitable business, and especially now with strong macro tailwind (raising interest rates) and raising trade in energy markets it earn more profits as BET itself. Especially Keler CCP is gaining momentum in 2022 onward. From the cashflow point of view, profits from Keler are most often moved to retained earning which is decided on annual meetings. Last year when dividend was paid was 2019. Hopefully, it will change in the future if National bank decrease its stake.

	2018	2019	2020	2021	2022	TTM 6/22-6/23
Share of Keler income (A)	685	481	497	747	794	3764
Share of Keler CCP income (B)	81	205	245	189	1650

·        All numbers in million forint

Total income:

I calculated total income individually using BET, Keler and Keler CCP disclosures. The point is, that BET financials itself tell another story mainly because of impairments of Keler group (see year 2022). You can see how unbelievably cheap it is trading now:

P/E = 3,69 (2022 income)

P/E = 2,94 (TTM income 6/2022 – 6/2023)

Forward P/E for 2023 = 2,76 (i estimate total income of 5000 mFT in fiscal year 2023)

*in case of ex-cash calculations, TTM P/E ratio would touch number 2

 

Asset valuation:

As you can see, in financial reports actual book value stands at 17828 mFT (06/2023).

46,67% of Equity in Keler and Keler CCP upon its reports is together 20675 mFT (12/2022). This is sum of values from Keller reports. There are no half-year reports at Keler, so we have to wait until new annual report to calculate fresh valuation of the stake.

There is development of the stake in time.

	2018	2019	2020	2021	2022
Share of equity of Keler Group	16424	15245	15989	16841	20675

·        All numbers in million forint

BET holds cash of 4070 mFT.

Cash + Stake in Keler = 24745 mFT

Market Cap = 13840 mFT

Do some simple SOTP math:

Exchange business (valued at 10 times earnings) = 10 000 mFT

+

Cash = 4070 mFT

+

Keler Group = 20675 mFT

=

34745 mFT

Actual market cap is 13800 mFT

There i should also mention an equity valuation of Keler group which by reports stands at 20675 mFT. However at TTM income of 3764 mFT it should be more real to value it  at something between 30000 – 45000 mFT, but this is another story. I will not include this in my basic valuation.

 

Final valuation:

SOTP = 34745 mFT = 2,51 x market cap = 0,39 P/B

Accounting P/B = 0,77

P/E = 3,69 (2022 income)

P/E = 2,94 (TTM income 6/2022 – 6/2023)

 

Dividend:

There is no general dividend policy. Before listing it was always decided on general meetings. Last dividend before listing (after accounting loss of -226 mFT) was 102 forint per share (4% yield at today price). There is still 15240 mFT retained earnings available for dividends on the book, which actually exceeds today market cap. Upon this year income estimation i quess next year dividend could be around 200 forint per share (8% dividend yield).

Final words:

As you can see, BET is extraordinarily undervalued. Two cheapest publicly traded stock exchanges i am aware of are Warsaw stock exchange (GPW) and Johanessburg stock exchange (JSE) , both trading at around P/E of 10. My best explanation of such undervaluation is recent listing which happened quite silently, combined with lack of financial data by mainstream financial data providers + brokers (company is not screenable now). I think this could could change in next year when data will start appear in databases or some activist investors will start to build up a stake. Sale of National Bank shares could also be a catalyst event. Until then, we can enjoy at least some dividends

Head i win, tail i not lose too much:

Even in case of worst case scenario (economy downturn, low interest rates again, war) i do not see a possibility of even lower valuation (it is trading around P/E14 ex cash  of 2018 income). In case of any other outcome (long term high interest rates, economy recovery) it is a clear multi-bagger.

I welcome any comments from you or contribution on further deeper analysis. In case of need for help, do not hesitate to get in touch with me. I can speak hungarian, so maybe i can help with some translations.

Disclosure: I own shares in BET on long side. This is not an investment advice, do your own research before investing.

 

[SongDonkey.AI]

Interesting post, thanks!

Looks like it should be moved to Investment Ideas section.

[Luca]

@Parsad

[Spekulatius]

Yes, this one looks interesting, as it is a fairly stealthy security.'

One needs to take into account the political risk since Prime Minister Victor Orban is quite something.

[Parsad]

18 hours ago, SongDonkey.AI said:

Interesting post, thanks!

Looks like it should be moved to Investment Ideas section.

 

If you don't follow the title protocol (Ticker Symbol - Name of Company) it gets moved here.  The reason we do that is so it is easy to find a ticker or company by "Title" in the Investment Ideas section.  You have extensive titles like this and the search won't work properly.

 

Cheers!

[Castanza]

18 minutes ago, Parsad said:

 

If you don't follow the title protocol (Ticker Symbol - Name of Company) it gets moved here.  The reason we do that is so it is easy to find a ticker or company by "Title" in the Investment Ideas section.  You have extensive titles like this and the search won't work properly.

 

Cheers!

We can’t search three letter tickers  Unless there is some specific way you’re supposed to do this? 

Edited November 8, 2023 by Castanza

[Parsad]

6 minutes ago, Castanza said:

We can’t search three letter tickers  Unless there is some specific way you’re supposed to do this? 

 

Yeah, go to "Investment Ideas", click Search by "Title"...all of the Investment Ideas will come up in alphabetical order with numerical tickers first.  It makes it easy to find any single ticker/company.  You have a title like the Budapest title and you'll never find any ticker/company.  Cheers!

[Castanza]

This doesn't work for me? Go to Investment ideas > "Content titles only" > hit search and nothing....Says you need to add a word to the search bar. If you type in a ticker that is only 3 characters in length it will not return anything. See second image when trying to search for BAC in the "Investment Ideas" forum. BUT if you search in the same manner for four character tickers such as GOOG you will get the correct topic (3rd image) The only way to get a list of the topics in Investment Ideas is to not search but to "Sort by Title" which gives you an alphabetical list. But then you have to randomly guess pages until you find the company you are looking for  

 

Appreciate everything you do Parsad, but this is my one gripe with the site  

 

1.)

 

 

2.)

 

 

3.)

 

[Parsad]

 

Cheers!

[LC]

Hi Killer- thank you for posting. 
 

Do we have a sense of the government/ regulatory environment? Is there a risk of nationalization, or govt sequestering  profits? I know nothing of the Hungarian social-economic environment. Overall how “business friendly” would you estimate the country to be? And, how shareholder friendly are Hungarian companies? Is there a culture of buybacks etc or is it more like Japan where companies tend to “hoard” cash?

[Killer022]

On 11/7/2023 at 1:07 PM, SongDonkey.AI said:

Interesting post, thanks!

Looks like it should be moved to Investment Ideas section.

I reposted it to Investment Ideas, so there are two threads now. If possible, i would like to ask admin to join them together, so these replies would not be lost...

[Killer022]

On 11/7/2023 at 3:26 PM, Spekulatius said:

Yes, this one looks interesting, as it is a fairly stealthy security.'

One needs to take into account the political risk since Prime Minister Victor Orban is quite something.

Yes, pretty stealth, but it will change hopefully.

Of course, there are some political risks, however, not so significant as foreigners could think...

[Killer022]

On 11/9/2023 at 2:01 AM, LC said:

Hi Killer- thank you for posting. 
 

Do we have a sense of the government/ regulatory environment? Is there a risk of nationalization, or govt sequestering  profits? I know nothing of the Hungarian social-economic environment. Overall how “business friendly” would you estimate the country to be? And, how shareholder friendly are Hungarian companies? Is there a culture of buybacks etc or is it more like Japan where companies tend to “hoard” cash?

 

Hi, thank you for your questions.

About the environment, already for a few years, the whole setup is driven in favour of promoting stock investing in general. Also listing main objective was in line with this setup. So this part is ok. Nationalization is not possible, i personally give it zero chance. There are plans to lower the ownership of state not contrary. Hungary is a normal EU country from “business friendly” perspective, nothing special. Very similar to countries like Czech, Poland, Slovakia, Croatia etc. Shareholder friendly question is a different story. It is quite stealth market, buybacks not very common, low liquidity etc. If it would be different, it would not be so extremely cheap. I believe that capital allocation can be change throught some activity in management...

[LC]

Thank you for your feedback

[SongDonkey.AI]

@Killer022

Many thanks for your idea!

Why do you think the market thinks so low about this stock?

[Killer022]

13 hours ago, SongDonkey.AI said:

@Killer022

Many thanks for your idea!

Why do you think the market thinks so low about this stock?

As mentioned in the analysis, main thing is about lack of data, because of recent listing. In next quarters it should become more transparent...