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NZX forecasts profit rise as growth initiatives pay off

Tuesday 13th August 2019

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Stock exchange operator NZX’s first-half net profit jumped 46 percent but only because losses from since sold businesses dragged down the previous first-half result, although it is predicting a better full-year result.

Operating earnings from continuing operations rose 4.3 percent and NZX says it is gaining traction with a number of growth initiatives.

These include a 73.5 percent increases to $7.7 billion in capital raised across NZX’s equity, debt and funds markets in the six months and a 15.1 percent increase in the number of trades on NZX, although the value of those trades fell 9.7 percent to $18.4 billion and led to a 17.3 percent fall in secondary market revenue.

Net profit for the six months ended June rose to $6.4 million from $4.4 million in the same period last year, which included $2.5 million in losses from the sold businesses. Excluding those losses, the net result was down 7.2 percent.

“Being a tighter, more focused business is paying off,” chief executive Mark Peterson told analysts on a conference call.

NZX is now seeing growth in almost every aspect of its business, Peterson said.

Shares of Napier Port will begin trading on NZX later this month after a $234 million capital raising.

It was the second IPO this year after a more than two-year drought since the May 2017 listing of Oceania Healthcare.

“We might have some further IPO activity before the end of the year,” Peterson said, a claim investors have heard before.

"We all know that these things have an element of uncertainty to them. We are hearing some good things and we’re doing everything we can and it would be great if they come off," he said.

“It’s one of those things we can’t commit to but it’s worth letting the market know that people are looking at their options.”

New listings on NZX in 2018 numbered just two, neither of them IPOs – QEX Logistics’ compliance listing and PaySauce’s backdoor listing through the shell of Energy Mad.

And 2017 wasn’t much better with Oceania Healthcare’s $200 million float in May that year and TIL Logistics Group’s backdoor listing in December.

But a number of companies big and small delisted from NZX last year including Xero, Trade Me, Tegel and SLI Systems.

NZX has been considerably more successful at encouraging debt listings – new retail listings rose 52 percent to $2.53 billion in the six months ended June while wholesale listings went from nothing to $1.47 billion.

Peterson says the retail appetite for listed bonds is “one of the unique features” of the New Zealand market but he doesn’t attribute the recent growth to falling bank deposit rates.

“I think the fundamentals of why it works probably haven’t changed too much.”

However, the Reserve Bank’s proposals to raise minimum bank capital requirements could impact on issuance – RBNZ is proposing that the big four banks nearly double their minimum capital from 8.5 percent of risk-weighted assets to 16 percent over a number of years.

“As banks think about their capital levels and think about how they utilise their capital, the corporates are probably sitting there saying, let’s make sure we’ve got some diversification if credit tightens up from the banking sector,” Peterson says.

A number of commentators have predicted those most likely to be squeezed by the proposed new capital requirements are farmers, the construction sector and small businesses.

Peterson says NZX’s $40 million subordinated notes issue last year is an example of a smaller business taking advantage of the listed debt market.

“We’re not a particularly large business but we managed to issue a bond in 2018 and issued it well.”

NZX’s total revenue in the latest six months fell 1.2 percent to $32.9 million.

It says changes made in October to its trading and pricing structure to facilitate increased trading automation should deliver growth over time. But those changes, and periodic re-weightings of NZX-listed stocks in large global indices, contributed to the fall in revenue in the latest first half.

On the positive side, on-market trading reached a record 61.1 percent of total market value traded in the month of June.

The company’s data and insights revenue rose 13.9 percent to $6.3 million with royalties from terminals rising 5.6 percent and subscription and licence revenue growing 22.9 percent.

Dairy derivatives trading volume rose 27.5 percent, making it the fastest-growing dairy derivatives globally.

A new extended-hours trading session aimed at capturing additional volume from Asia and Europe led to more than 50 percent of trades now taking place in that session.

NZX’s funds under management, including Smartshares Exchange-Traded Funds, SuperLife Superannuation and KiwiSaver funds, grew 19.4 percent to $3.5 billion with member numbers up 10.1 percent. Net cash inflows rose 8.1 percent to $174.4 million.

Operating revenue from funds management net of fund expenses rose 17.7 percent, resulting in a 27.4 percent rise in operating earnings.

NZX says its wealth technologies business continues to focus on winning new customers and that funds under administration rose 86.4 percent to $2.1 percent.

NZX will pay a 3 cents per share first-half dividend, the same as last year, and the dividend reinvestment plan will apply, offering a 1 percent discount. The record date is Aug. 30 and the payment date is Sept. 13.

NZX’s dividend reinvestment plan will apply with a 1 percent discount – that’s down from the 2 percent discount offered for last year’s final dividend and the 2.5 percent discount offered for the previous first-half dividend when the scheme was introduced.

Peterson says about 20 percent of shareholders participated in the scheme with last year’s first-half dividend and about 25 percent participated for the final dividend.

Directors are guiding for full-year operating earnings of $28-31 million, subject to market outcomes, particularly the number of initial public offerings, secondary capital raisings and equity and derivatives trading volumes.

Operating earnings in calendar 2019 from continuing operations were $27.3 million.

NZX shares are 1 cent lower at $1.19. They have gained 10 percent in the past year compared with the more than 20 percent gain in its benchmark S&P/NZX 50 Index.


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