NZX Limited

Company Overview: NZX Limited (NZX: NZX) operates New Zealand securities, derivatives and energy markets, including building and maintaining the infrastructure on which they operate. The Company provides funds management services. The Company's segments include Markets, Funds Services, and Corporate. Its Funds Management segment is a provider of superannuation funds, KiwiSaver funds and Exchange Traded Funds.

NZX Details

NZX Limited (NZX: NZX) operates New Zealand’s equity, debt, funds, derivatives, and energy markets. It also provides clearing, trading, depository, settlement, and data services. 

Looking at the past performance, NZX’ topline and bottomline for FY16-20 grew with a compounded annual growth rate (CAGR) of 0.29% and 17.65%, respectively. Its total revenue for FY20 stood at $78.43 million, as compared to $77.54 million in FY16. Its net income for FY20 stood at $17.59 million, as compared to $9.18 million in FY16.

Exhibit 1: Operating Performance

Source: Company Reports, Analysis by Kalkine Group

Financial Performance (H1FY21 ended 30 June 2021)

• Revenue up ~11% YoY: Revenue from continuing operations for the 6 months to 30^th June 2021 period stood at $42.45 million, an increase of 10.6% on previous corresponding period. Due to investment in growth activity alongside increased spend in people and technology costs, operating margin was lower at 39.9%.
• NPAT Down ~16% YoY: Net profit from continuing operations for 6 months to 30^th June 2021 stood at $7.63 million, a decline of 16.0% on previous corresponding period. This can be attributed to capital expenditure which was focused on investing in IT capacity, resilience and security, growth opportunities within Smartshares and NZX Wealth Technologies and, in 2021, creating a fitting home for New Zealand’s Capital Markets in Auckland.
• Interim Dividend at 3 cps: Net tangible assets per Quoted Equity Security for the period stood at -$0.0101, as compared to -$0.0145 in the pcp. The Board of Directors declared a fully-imputed interim dividend of 3.0 cents per share.

Exhibit 2: Key Data

Key Data (Source: Company Reports)

Financial Performance (FY20 ended 31 December 2020)

Total Revenue up 12.8%: The company’s revenue from continuing operations for full year period stood at $78.43 million, an increase of 12.8% on previous year. Operating earnings from continuing activities for the period stood at $34.4 million, up 9.7% on FY19. Total net profit for the full year period stood at $17.59 million, an increase of 20.1% on previous year. The result can be attributed to the need of having access to capital for New Zealand businesses, as 2020 presented challenges for many sectors of the economy. Revenue growth came from across Capital Markets, Smartshares and NZX Wealth Technologies. Securities trading and clearing revenues were up strongly, with listing and data revenues also showing good growth. Higher costs in 2020 were driven by increased spend in technology, alongside investing in people and capability to support the growth and sales opportunities that are being created.

Decent Dividend for FY20: The board of directors declared a final dividend of 3.1 cents per share which was paid on 26 March 2021, contributing to a FY2020 dividend of 6.1 cents per share, fully imputed. This figure along with strong appreciation in NZX’s share price, delivered total shareholder return (TSR) of 50.3% for FY20.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 28.78% of the total shareholding. Accident Compensation Corporation and Aberdeen Asset Managers Ltd. are holding maximum stake in the company at 6.16% and 5.23%, respectively, as provided in the table below:

Exhibit 3: Top 10 Shareholders

(Source: Analysis by Kalkine Group)

A Quick Look at Key Metrics: The company’s ROE for H1FY21 stood at 11.2%, better than the industry median of 5.3%, implying that the company generated better return for its shareholders. Its Debt-to-Equity Ratio for H1FY21 stood at 0.65x, better than 0.73x in H1 FY 2020. Its Return on Invested Capital for H1FY21 stood at 6.5%.

Exhibit 4: Key Metrics

(Source: Analysis by Kalkine Group)

Recent Updates:

• On 6 September 2021, the company published its monthly Shareholder Metrics for August 2021, wherein it highlighted that total market capitalization for the month stood at $231,866 million, up 10.9% YoY. Total value traded under cash market stood at $4,792 million, up 18.8% YoY.
• On 8 August 2021, NZX provided Shareholder Metrics for July 2021, wherein it highlighted that Total equity securities (NZX Listed Issuers) was up by 3.9% YoY. Total fund securities for the period declined by 2.0% YoY.
• On 20^th July 2021, the company highlighted that New Zealand’s Exchange and S&P Dow Jones Indices launched S&P/NZX 50 Portfolio ESG Tilted Index. With the heightened focus on the impact of companies’ environmental, social and governance (ESG) footprints, this index serves as an independent as well as transparent tool when it comes to measuring ESG performance as more investors incorporate sustainability targets in their investment decisions.

Outlook:

Progress on Improving Investor Experience: The ongoing strategic progress from removing the fixed-fee elements of trade fees, improving rules to support price transparency and attracting new Participants and investors to the NZX, is expected to help the company in the long run. This development is opening up access to a broader range of investors, lifted on-market activity and is delivering improved liquidity to the exchange.

Emphasis on Improvement in Technology: The company has identified certain issues that have affected its technology platforms and market participants in 2020 and recognised the need for further investment in technology to enhance platform stability and resilience, and deliver other improvements, confirming additional spend on people and systems in 2021.

FY21 Guidance: The company expects its 2021 operating earnings to be in the range of $32.0 million to $35.5 million, with guidance subject to market outcomes, particularly with respect to market capitalisation, total capital raised, secondary market value and derivatives volumes traded, funds under management and administration growth and technology costs.

Key Risks:

The company is susceptible to certain risks such as Financial risks which arise through various sources including: adverse strategic decisions (including inappropriate resource allocation); general market risk – including lower numbers of listed issuers, less listing and capital raisings, lower levels of trading activity, market capitalisation declines; counterparty credit risk in operating the clearing house; and operational errors, undetected fraud or poor execution of projects that are designed to deliver the strategy.

Valuation Methodology: P/BVPS Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation:

The company’s achievements and results for the first half of FY21 reflects its strength across all its business activities. Alongside the robust growth the company reported in the funds business, Smartshares, as well as the further expansion of NZX Wealth Technologies, the company has witnessed increases in the number of listed securities, the amount of primary capital garnered as well as the level of trading activity.

The stock has been valued using a relative valuation method, i.e., Price to BVPS multiple based valuation (on an illustrative basis) and there are expectations that the stock price might witness a rise of low double-digit (in % terms). A slight premium has been applied to Price/BV Multiple (NTM) (Peer Average) considering the fact that the company has operations in diverse business segments as well as decent outlook.

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$1.730 per share on 27^th September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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