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. The company also offers the range of information as well as data to support market growth and development in the securities as well as dairy sectors.

NZX Details

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

Looking at the past performance, the company’s 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: The company’s revenue from continuing operations for the interim period stood at $42.45 million, an increase of 10.6% on previous corresponding period (pcp). Operating earnings for the six months period stood at $16.9 million, a decline of 3.5% on pcp. Due to investment in growth activity alongside increased spend in people and technology costs, operating margin was lower at 39.9%. Operating expenses rose to $9 million, reflecting additional roles to support growth, higher information technology costs to support capacity and resilience improvements, professional fees from assurance services which includes operations and energy audit obligations.
• Improved Earnings for NZX Wealth Tech.: NZX Wealth Technologies’ operating earnings are now positive for the first time at $0.13 million, with revenues increasing materially due to the onboarding of new clients. The division is investing in increased sales activity, client support and technical staff. Due to additional data hosting, data feeds and software licensing costs relating to new clients, cost related to Information Technology (IT) increased.
• NPAT Down ~16% YoY: Net profit stood at $7.6 million, a decline of 16.0% on previous corresponding period. The company’s Board declared the fully-imputed interim dividend of 3.0 cents per share.

Exhibit 2: Key Metrics

(Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 30.41% of the total shareholding. Accident Compensation Corporation and Aberdeen Asset Managers Ltd. are holding maximum stake in the company at 6.14% and 5.21%, 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 5.9%, implying that the company generated better return for its shareholders. Its Return on Invested Capital for H1FY21 stood at 6.5%.

Exhibit 4: Key Metrics

Source: Analysis by Kalkine Group

Recent Updates:

• On 5 October 2021, NZX provided Shareholder Metrics for September 2021, wherein it highlighted that Total equity securities was up by 3.1% YoY. Total fund securities for the period declined by 2.0% YoY. Total retail debt securities for the period increased by 2.9% YoY. Total market capitalization at the end of September 2021 was $232,268 million, an increase of 11.6% YoY.
• On 20 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 and transparent tool in measuring ESG performance as more investors incorporate sustainability targets in their investment decisions.

Outlook:

Progress on Improving Investor Experience: The company stated that there was evidence of 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. This development is opening up access to a broader range of investors, lifted on-market activity and delivered improved liquidity to the exchange. Alongside the increase in value traded across the NZX, the company continued to observe growth in on-market liquidity levels which have now normalised above 60%.

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 arising 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: Price/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 the strength across all its business activities. Notably, the total traded value of $27 Bn during H1 FY 2021, as well as more than eight million trades, implies heightened interest from all the investor segments as well as engagement in the markets throughout different forms of investments as well as asset classes.

The stock has been valued using Price/BVPS multiple based illustrative relative valuation method and arrived at a target price which reflects a rise of low double-digit (in percentage terms). A slight premium has been applied to Price/BV Multiple (NTM) (Peer Average) considering decent outlook as well as considering the company’s focus towards deployments in technology.

Hence, we give a “Buy” recommendation on the stock at the closing market price of NZ$1.71 per share, down by 0.58% on 11^th October 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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