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NZX 1H earnings decline, as fewer IPOs weigh while costs grow

Wednesday 19th August 2015

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NZX, the stock market operator, reported a decline in first-half operating earnings as fewer companies listed, but expects more capital raising in the coming six months. The sale of Link Market Services boosted net profit.

Profit rose to $18 million in the six months ended June 30, from $7 million a year earlier, reflecting an $11.8 million net gain from the sale of its 50 percent stake in the Link NZ shareholding registry, the Wellington-based exchange said. Stripping out the sale proceeds, profit fell 12 percent to $6.2 million. Sales rose 10 percent to $34.4 million, while operating expenses were up 19 percent to $22.7 million. 

Sales in the company’s capital markets business rose 0.2 percent to $17.8 million, although its listing revenue was down 12 percent to $5.5 million. Listings on the main board have dropped off, with only one company Fliway Group listing on the exchange in the period, after a flurry activity of last year, fuelled in part by the government's sell down of its utility companies.

“We are expecting a stronger second half in terms of capital raisings both primary and secondary," NZX chief executive Tim Bennett told a media briefing. "We are in a fairly or fully valued market environment with some global uncertainty and that always drives, either positively or negatively, listings, so we’re reluctant to comment on that."

Bennett pointed to the recent on-market sale of Origin's controlling stake in Contact Energy as a sign there were strong capital flows in the New Zealand equity market. 

NZX also launched its new market, NXT, which targets small-to-medium sized business, with the debut of G3 Group in June and Bennett said it will take five to 10 years to build the new market so it was way too early to say whether it is successful yet.

“There is strong adviser interest there, we’re talking to lots of companies about it, but we will judge its success in three to five years time."

The company has a binding agreement to buy 100 percent of Apteryx for an initial payment of $1.5 million, with a further $2.5 million payable if funds under administration reach $3 billion and annualised revenues reach $3 million by Sept. 30, 2016.  The company, which allows investment advisers and providers to manage, trade, and administer client funds, generated annual revenue of $1.2 million and had $1 billion of funds under management as at March 31.

“We believe it will become an industry utility to enable better access for both advisers and investors into the market,” Bennett said.

NZX has been diversifying from its capital markets core business by expanding into funds management, buying SuperLife in December as part of a plan to roll out new exchange traded funds which it could then offer as a low-cost KiwiSaver option. Sales in the funds management business jumped 297 percent to $4.8 million, reflecting a boost in earnings from the SuperLife acquisition. 

The soft commodities unit reported a 13 percent decline in sales to $664,000, as trades in its Clear Grain Exchange were 24 percent lower than the same period a year earlier.  

Lots traded in the company’s dairy derivatives business jumped 143 percent, with strong growth continuing in the second half, Bennett said. He expected August to be a record month for activity in the business. 

“It’s become a very effective tool for global dairy market participants to hedge their price risk in what is obviously quite a volatile time in that industry,” he said.

The agri publications and data business revenues declined 5.7 percent to $5.7 million, as print advertising sales dropped due to "adverse market conditions in the rural sector, with a rapid decline in dairy prices and drought conditions in some regions".

Market operations, which includes the Electricity Authority contracts and the Fonterra Shareholders' Market, were little changed at $5.3 million. 

The company put the increase in costs down to $1.9 million of SuperLife expenses, the launch of new Smartshare ETFS, and a $1.1 million increase in professional fees due to its long-running dispute with the former owners of the Clear Grain Exchange.

NZX claims Ralec’s forecasts were misleading when the stock market operator purchased the grain exchange in 2009 for A$6.9 million upfront and potential earn-outs of A$7 million. It had earlier flagged it expected to spend a minimum $1 million on legal fees related to the dispute this calendar year. Bennett said today the company expects to spend about $2 million on the litigation this financial year.

“The quantum of that is somewhat uncertain because we have five months to go and the court process drives some of those costs,” Bennett said. “Overall, I would expect to have spent $3 or $4 million on that litigation.”

When NZX sold its stake in Link NZ to its Australian counterpart in June for up to $14.3 million, it signalled interest in buying the Reserve Bank's NZClear settlement system.

“That has entered the next phase of the process – unfortunately as part of that stage of the process we’ve executed a confidentiality agreement with the Reserve Bank and are unable to comment any further,” Bennett said.

The board declared a 3 cents per share interim dividend, unchanged from a year earlier. 

NZX shares last traded at $1.06, and have declined 11 percent since the start of the year. 

BusinessDesk.co.nz



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