NZX Annual Result 2007
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NZX Annual Result 2007: New Reporting Format NZX conducted a survey in 2007 that indicated a desire amongst analysts to see a stronger focus on future outlook and more detail on our subsidiaries and strategic investments in our financial release. Accordingly, NZX will produce a detailed report at Full and Half Year result periods that comprises four sections:
If you have questions or comments about the new reporting format or require more information about NZX, please contact Lucy McFadden, NZX Communications on +64 4 496-2890 or lucy.mcfadden@nzx.com
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I. NZX Group: 2007 Performance Summary
NZX reports strong result for 2007 – EBITDA up 41%
15 February 2008 - NZX has released a strong 2007 annual result showing EBITDA for the NZX Group up 41%.
NZX Group – 2007 Performance
- Operating revenue: $31.45 million versus $25.03 million in 2006, an increase of 26%.
- Operating expenses: $16.71 million versus $14.23 million in 2006, an increase of 17%.
- EBITDA: $14.74 million versus $10.44 million in 2006, an increase of 41%.
- EBITDA margin: 47% versus 42% in 2006, an increase of 12%.
- NPAT: $8.71 million versus $6.50 million in 2006, an increase of 34%.
- NPAT margin: 27.7% versus 26% in 2006, an increase of 6.5%.
- Fully diluted earnings per share: 36.17c per share versus 27.91c per share in 2006, an increase of 30%.
NZX CEO Mark Weldon said, “EBITDA for the NZX Group was up 41% in 2007. This is evidence of the resilience and strength of our business in a year where market conditions were characterised by uncertainty and volatility. “The financial results continued the trend of previous years with revenues growing faster than costs, and both earnings and margins improving significantly. Key contributions came from the data and listings areas, with a particularly strong showing by secondary capital raisings. Also worth noting in this result are the improved contributions from Smartshares and a much improved year from Link Market Services.
“AXE experienced delays in regulatory approvals, which NZX is confident will be resolved early in 2008. NZX expects to see increased earnings contributions to the Group result from all the above-named subsidiaries.”
Overall operating expenses increased 17% to $16.71 million in 2007. The majority of this increase was in relation to employee costs associated with businesses purchased in the second half of 2006 and 2007. NZX also opted to make the maximum 4% employer KiwiSaver contribution from the 1 July 2007 KiwiSaver launch date.
NZX Markets Business – 2007 Performance
- Total NZX Markets operating revenue grew to $28.55 million, from $23.00 million in 2006, an increase of 24%.
- The NZX market information business generated $10.54 million in revenue, an increase of 72% on 2006. Key drivers were continued growth in demand for NZX data with the number of real time terminals worldwide at the end of 2007 up 20% on 2006, and revenue growth from acquired businesses Company Research Centre (formerly IRG Data), NZX Agrifax, FundSource and NZX NewsRoom. These new businesses together provide a full suite of New Zealand business data offerings.
- Listings revenue grew to $9.10 million, a 12% increase on 2006. There was also a significant level of secondary capital raised in 2007 with existing issuers raising capital for growth and acquisitions.
- Trading, clearing and settlement revenue was up 3% on 2006 at $4.85 million.
NZX Subsidiaries and Strategic Investments – 2007 Performance
- Smartshares EBITDA reached $673,000, a 24% increase on 2006.
- Link Market Services delivered an EBITDA result of $985,000 versus $325,000 in 2006. Link also began to return capital to NZX, redeeming preference shares in 2007.
- AXE ECN has worked effectively with ASIC on gaining regulatory approvals, which we confidently expect in 2008. AXE also announced that it will move quickly to launch a full trading facility in addition to the reporting facility.
- A key event in 2007 was the announcement of the formation of TZ1 Carbon Market.
NZX Capital Management
NZX’s current dividend policy is to pay a dividend of up to 60% of NPAT. Continuing this policy, NZX will pay out 60% of NPAT for the 2007 year, giving a total distribution of $5.2 million, or 21 cents per share, fully imputed. The NZX Board has also resolved that if the 10-day volume weighted average price (VWAP) of the NZX share price is below $8.50 immediately prior to the NZX Annual Meeting on 10 April 2008, the dividend reinvestment plan will be suspended, and dividends for all shareholders will be paid in cash. If the 10-day VWAP is $8.50 or above, the dividend reinvestment plan will remain available. In this circumstance, shares issued under this programme will be at the 10-day VWAP. In line with this policy, the NZX Board will make its final capital management announcement in respect of the dividend distribution at the Annual Meeting.
NZX’s capital management policy is to fund infrastructure investment, organic growth and bolt-on acquisitions from retained earnings. Any larger investments or acquisitions will likely be funded from existing cash reserves, and thereafter by debt funding.
ENDS
A detailed performance report, Statements of Financial Performance, NZX Operating Metrics for 2007 and the Appendix 1 disclosure are available to download from the NZX website:
http://www.nzx.com/aboutus/investor/financial.
For more information, please contact:
Lucy McFadden
Communications
New Zealand Exchange Limited
04-496-2890
027-512-7832
II. NZX Group: 2008 Outlook
Strategy
NZX group has two dominant areas of strategic focus for 2008.
First, infrastructure and market development. Central to this is implementation of a Central Counterparty (CCP), a Central Securities Depository (CSD) and an upgraded Clearing and Settlement infrastructure. This will benefit our broker customers by enabling them to scale their own businesses better and to manage risk more simply, and will enable the development of a strong, New Zealand-based derivatives market with a wide range of products traded including equity derivatives and commodities. A sharpened focus on specific aspects of the listing and liquidity areas is also a priority. Improvements to liquidity throughout market microstructure, new products, greater use of Direct Market Access (DMA) and continued work with technology companies on listing will predominate.
Second, further developing international niche businesses that leverage our skills and knowledge. NZX’s focus is on creating opportunities in products and jurisdictions with higher growth characteristics than our domestic business. AXE and TZ1 are key components of this, but NZX expects these to be augmented by additional international investment in 2008.
NZX will, as previously, continue to assess and, as appropriate, execute manageable “bolt-on” acquisitions at sensible prices in the data area.
Financial Performance
The strategy executed by NZX over the past four years has built increased financial resilience to short-term changes in market performance, listings and liquidity. Accordingly, while there remains uncertainty for 2008, NZX is confident of continuing to deliver improved financial results at Group EBITDA and NPAT levels.
Until this point, the NZX business has been relatively simple, with the focus very much on EBITDA. Going forward, however, NZX’s subsidiaries and investments will become increasingly important. Accordingly, we will report on their performance and outlook in greater detail from this point on.
Team
Our approach to organisation is driven by the need to be expert at three things: running a strong and resilient market, innovating and executing projects.
All our recruitment, development, incentive and other talent programmes are driven by the need for the wider NZX team to be expert in these three activities.
Capital Management
NZX’s current dividend policy is to pay a dividend of up to 60% of NPAT. Continuing this policy, NZX will pay out 60% of NPAT for the 2007 year, giving
a total distribution of $5.2 million, or 21 cents per share, fully imputed. The NZX Board has also resolved that if the 10-day volume weighted average price (VWAP) of the NZX share price is below $8.50 immediately prior to the NZX Annual Meeting on 10 April 2008, the dividend reinvestment plan will be suspended, and dividends for all shareholders will be paid in cash. If the 10-day VWAP is $8.50 or above, the dividend reinvestment plan will remain available. In this circumstance, shares issued under this programme will be at the 10-day VWAP. In line with this policy, the NZX Board will make its final capital management announcement in respect of the dividend distribution at the Annual Meeting.
The Group currently has no borrowings. NZX anticipates that opportunities may arise which require larger investment amounts. For opportunities with the right returns profile, NZX is likely to obtain debt funding. Debt funding will only be undertaken where it reduces the WACC from its current equity-only basis.
A. NZX Markets Business: Future Outlook
Strategy
The group priorities aimed at infrastructure, derivatives and liquidity improvements are directly centered in this area.
The new Trayport trading system implemented in 2007, combined with an upgraded Clearing and Settlement system in 2008, will increase the range of products able to be traded on NZX markets. The new Clearing and Settlement system will enable a range of derivative products - equities, commodities and carbon - to be traded and cleared at a low marginal cost to customers. Equity derivatives and commodities are the focus.
The performance focus for liquidity is to improve the underlying liquidity of NZX markets at every level of listed product. Microstructure initiatives (e.g. market makers and DMA) are critical.
These major technology upgrades, and the product opportunities they enable, are expected to have a positive impact on overall market liquidity. The 2008 performance target in liquidity is to see average daily trade numbers increase 10% from the current level of 2,500.
Financial
Of the business lines most influenced by local market share price performance (i.e. bull vs. bear), listings has the greatest sensitivity. Bull or stable markets result in strong listing growth; bear markets do not. While the market information business is not exposed to market performance, it has some exposure to global financial institution headcount changes, where significant headcount cuts could impact terminal numbers.
B. NZX Subsidiaries and Strategic Investments: Detailed Performance and Future Outlook
Strategic Criteria
NZX’s domestic subsidiaries and investments Smartshares, Link and Appello align with NZX’s strategic investment criteria of deepening and improving the quality of the overall New Zealand capital markets.
For NZX to make international investments, these must extend market infrastructure or expertise into high growth niche areas, increasing our scalability and growth outlook.
NZX spends significant time evaluating the strategy of each potential business investment. NZX’s approach to managing its positions in subsidiaries and investments is similar to that of a listed investment company. For non 100%-controlled subsidiary companies, NZX manages its exposure through boards and governance, rather than through directly managing the businesses themselves.
Business Overview
Smartshares is a wholly-owned subsidiary of NZX. As at 31 December 2007, Smartshares had $652 million in funds under management. Smartshares manages five listed, exchange traded funds (ETFs) all of which are registered as Portfolio Investment Entities (PIEs). Smartshares also has its own KiwiSaver scheme, Smartkiwi. Smartshares funds focus on the most tax efficient investment geographies for New Zealanders.
Strategic Attributes
Smartshares, New Zealand’s largest passive funds provider, provides a low-cost investment option for retail investors. For the “entry level” investor segment, Smartshares provides diversified investment options where investors may not have wealth to create a diversified portfolio themselves, thus allowing an easy “first step” into the equity markets. As ETFs are good lenders of stock, Smartshares intends to lend its stock to help develop the (currently nascent) short side of the NZX markets. This should result in liquidity growth in the overall NZX markets.
Financial Attributes
Smartshares has a scalable business model. Smartshares have very low redemption risk, as when investors exit their Smartshares position, they sell on market rather than redeeming units. This provides significant financial stability.
Revenue growth for Smartshares in 2007 was up 33%. Expenditure in 2007 was up 35%, driven by costs associated the introduction of the PIE regime and our Smartkiwi KiwiSaver products. Absent these one-off costs, expenditure growth would have been 24%, and NPAT would have risen by 65%.
Future Outlook
Over each of the last four years, Smartshares’ main focus has been on acquiring new funds, launching new funds, or adding product features such as direct deposit. For 2008 the focus is purely on improving Smartshares’ profitability through managing fund expenses downward, growing units in the existing Smartshares funds and adding revenue lines such as those arising from the introduction of stock lending.
Smartshares expects to deliver significant productivity and cost improvements in 2008. While revenue has reasonable reliance on market performance, any risks to this area should be balanced by new units created and the initiation of stock lending activities. Upside to the financial year would come from winning wholesale mandates from institutions that have experienced underperformance relative to the market during the recent market volatility.
Operating Metrics
2007 |
% Change |
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| Funds Under Management | $652 million |
30% |
| Number of Retail Unit Holders | 15,011 |
2% |
Financial Highlights
2007 |
% Change* |
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| Operating Revenue | $3.10 million |
33% |
| Operating Expenses | $2.42 million |
35% |
| Operating EBITDA | $673,000 |
24% |
| Operating EBITDA Margin | 22% |
23% |
| NPAT | $442,000 |
27% |
| NPAT Margin | 14% |
15% |
* Margin numbers (Operating EBITDA, NPAT) are shown as actual levels rather than % change.
Business Overview
Link Market Services Limited (“Link”) is a 50:50 joint venture company between NZX and Link Market Services Australia (owned by Pacific Equity Partners). Link provides a full range of registry services for both listed and unlisted issuers. Link now has approximately 30% of the New Zealand registry business by number of issuers. In 2007 Link captured approximately 40% of IPOs by number.
Strategic Attributes
Link provides another means for NZX to benefit from growth in the IPO and secondary issuance market. NZX also invested in Link to bring real competition and innovation to the registry market. Link has succeeded in raising significantly the level of technology and service provided to issuers in the New Zealand market, and improving the overall New Zealand capital markets. As this increases the overall competitiveness and value of a listing, it aligns well with NZX’s long-term goals.
Financial Attributes
Link provides high quality, reliable revenue as issuers tend to remain for a significant period of time with their registry provider.
As Link’s core registry systems are electronic, Link exhibits good scalability. Link is currently at the level where margins will now improve with revenue growth. Link also provides some cyclical protection for NZX. In particular, there is little difference in the registry business between a debt and an equity IPO. Link also receives capital markets work in takeovers. While takeovers are negative for the NZX Markets businesses, Link receives additional capital markets work, providing some hedge from such events.
2007 Financial Results
Link experienced strong revenue growth of 38% in 2007. This resulted in a $985,000 EBITDA result, up from less than $325,000 in 2006. In 2007 Link returned $700,000 in Redeemable Preference Shares to its two shareholders and made an NPAT profit for the first time.
Future Outlook
The focus for 2008 is purely on execution of the core business model. Link’s last three years have all had a development focus (core system, wholesale debt functionality, a business service centre, and upgrades in electronic communications approach for issuers). In 2008 the focus is on growing profitability.
In 2008 LINK is expected to return over $1 million in Redeemable Preference Shares to its shareholders, driven by improved EBITDA and NPAT results. Link has some sensitivity to the IPO market, so the actual EBITDA outcome could range from slightly to materially improved.
Operating Metrics
2007 |
% Change |
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| Number of Holders | 320,000 |
7% |
| Total Number of Issuers | 144 |
11% |
| IPOs Won | 40% |
0% |
Financial Highlights
2007 |
% Change* |
|
| Operating Revenue | $4.151 million |
38% |
| Operating Expenses | $3.166 million |
18% |
| Operating EBITDA | $985,000 |
203% |
| Operating EBITDA Margin | 24% |
11% |
| NPAT | $26,000 |
105% |
* Margin numbers (Operating EBITDA, NPAT) are shown as actual levels rather than % change.
Business Overview
AXE ECN (“AXE”) in Australia is a joint venture between NZX and five major broking firms (Citigroup, Goldman Sachs, Commonwealth Securities, Merrill Lynch, Macquarie). AXE crossings platform is expected to start trading in the first half of 2008. We confidently expect full trading to commence in the September quarter of 2008.
Strategic Attributes
AXE gives NZX access to the scale of the Australian capital market. NZX has earned its spot on the AXE ownership group by its ability to extend its world-class (in terms of speed and scalability) trading system, and its skills at running both regulated markets and an exchange business. This also allows NZX to provide world class infrastructure across two markets, rather than one.
NZX believes that, in the medium-term, the New Zealand and Australian capital markets will function more and more as one market. In this event, the NZX system will be the only trading system providing common Australasian access via standardised FX 4.4 interface, world-class speed of execution (a platform measured with confidence as being faster than the Australian incumbent), high scalability, high trans-Tasman bandwidth, and knowledge of both regulatory environments. As the markets converge, this platform will be valuable in bringing new liquidity to NZX (i.e., brokers will already be connected to the platform), and providing real options for further NZX business in Australia.
Financial Attributes
AXE is a very scalable business. The two main revenue lines will come from trading and the sale of market data, both provided by the core trading system. Staffing should remain reasonably static with liquidity growth.
NZX will receive a fixed cost for the provision of market operations and market surveillance services. This will ensure that AXE remains current with global trends and regulatory requirements, and provides a fair commercial return to NZX.
2007 Financial Results
The timing of the Australian election delayed AXE’s launch in 2007. The near-term focus for AXE is thus securing an Australian Market Licence (AML) to enable Phase I of the business to be operational by May 2008.
During 2007 AXE generated revenues of AUD$189,000, incurred total expenses of AUD$1.475 million, and has recognised a future tax benefit in relation to these of AUD$383,000, resulting in an after-tax loss of AUD$903,000 for 2007. The total future tax benefit recognised on the balance sheet as at December 2007 is AUD$608,000. It is expected that AXE ECN will derive taxable income in the future to utilise this benefit. While it awaits approval of its AML application, AXE has attracted significant interest within the Australian financial service sector. The need for competition in this area prompted Australian brokers, institutional investors and industry groups to make positive submissions to the local regulator. The AXE crossings platform is due to start trading in the first half of 2008, with full trading commencing in the September quarter.
Future Outlook
The AXE business will launch in two phases in 2008. First, AXE will offer a trade-reporting facility (similar to BOAT in Europe). Second, AXE will launch a full electronic order book and matching engine to trade ASX listed securities, developing a full continuous auction model to complement the crossings platform. Full trading is expected to commence in the September quarter of 2008.
Both the AXE Board and NZX are positive about the 2008 financial and strategic prospects for the business.
The risks to AXE centre around potential stalling by ASX in providing timely access to its vertically integrated CHESS Clearing and Settlement infrastructure.
The prospect of volatile markets in Australia is not negative for AXE. One of AXE’s key competitive advantages is pricing, which will become even more important if broker profits are squeezed, and attention switches to costs.
AXE’s business model - based on providing a technological advantage to clients, a best-execution orientation, and customer-focused pricing - is expected to generate significant interest and market share.
Business Overview
In December 2007, NZX announced the establishment of TZ1 as a separate company, with initial funding from NZX, and announced a very strong executive team. TZ1’s ambitions are global, while retaining a strong New Zealand identity and focus.
Carbon is emerging as a significant globally traded commodity: greenhouse gas emission permits and credits were traded for €40.4 billion in 2007, an increase of 80% on the previous year.
TZ1 will launch its emissions trading platform in 2008, following the passage of both carbon trading and Clearing House legislation, which together support trading of carbon on an exchange in New Zealand.
Strategic Attributes
The New Zealand Emissions Trading Scheme (NZETS), announced by government in Q4 2007, provides a key competitive advantage for New Zealand. As the only domestic emissions trading scheme outside Europe, and the only all-sectors and all-gases Kyoto-linked scheme in the world, the NZETS will help create a market for supply and demand of globally fungible (interchangeable) Kyoto credits.
NZX's knowledge and networks established in this area over the past 18 months, together with its infrastructure and skills, enables TZ1 to seize an early-mover advantage in this fast-growing global market. For NZX, TZ1 provides an opportunity to extend its existing infrastructure (trading, clearing, settlement and data distribution channels) into a growing global market at an early stage.
Financial Attributes
TZ1 is a start-up, and very scalable, business. The business model revolves around a market infrastructure platform with a fixed cost base. NZX will provide TZ1 with corporate services and market operating services for a fixed annual fee. Together this provides TZ1 with a cost-effective fixed operating cost structure – with other expense purely focused on growth outcomes.
The three key business areas are carbon registry, voluntary carbon trading (largely spot), and trading in compliance units (e.g., NZUs and CERs) in both spot and futures markets. As with any other market, volume will result in scalability of returns.
As transacting carbon involves the creation of a new set of products and a broader range of participants, a reasonable lead time to launch and profitability is expected.
There are three broad possible outcomes for the TZ1 business. First, TZ1 establishes a strong global market position, with particular strength in the Asia-Pacific time zone, with the company being very successful as a stand-alone business. Second, TZ1 establishes a competitive domestic Australasian market platform whereby shareholders are rewarded with a moderate return on investment, and the business realises capital value for its shareholders by combining with complementary business. Third, the business does not reach anticipated scale and is excluded from any subsequent consolidation.
2007 Financial Results
There were no separately reported 2007 revenues or costs for TZ1. All development and set-up costs (employees, legal etc.) are included in NZX’s operating expenses for 2007.
Future Outlook
The TZ1 team has two key areas of focus for 2008. Firstly, determining its strategy with respect to strategic offshore relationships, cornerstone investors, capital-raising,
strategic acquisitions and other business initiatives. Secondly, execution:
a successful launch of its trading platform.
Appello Services
Business Overview
Appello Services Limited is a start-up fund management services business which provides a set of fully electronic administrative and compliance services for New Zealand fund managers. Appello was established in response to the increasingly complex technology needs of fund managers (including those created by the PIE tax regime).
Strategic Attributes
The Appello business model addresses a gap in the current fund management business by providing a fully electronic, scalable system capable of managing multiple asset classes. The potential customer base is increasing due to new product opportunities as a consequence of the PIE regime, and the expected flow of money into managed funds.
Appello increases NZX's exposure to the funds management industry, which is attractive because of PIE and KiwiSaver. There are no integration costs to NZX in this business, but real value delivered because of NZX's involvement – including knowledge gained through Link. The board and CEO of Appello have proven expertise in the sector.
Financial Attributes
A fixed cost base and a heavily automated business will drive significant scalability as multiple customers are served off the same technology and networks.
Equally, once a fund manager changes (or selects for the first time) its registry and administrative solution, the customer is generally committed to the product for the long term, as it becomes an essential part of the customer’s operations and switching costs are high.
2007 Financial Results
NZX acquired 30% of Appello in November 2007. This business is in the start-up phase and, as expected, is currently making a loss as no significant revenues have been delivered. To date Appello has incurred total expenses of $75,000 and has recognised a future tax benefit in relation to these costs of $25,000, resulting in an after-tax loss of $50,000 for 2007. The future tax benefit has been recognised as Appello will derive taxable income in the future to utilise this benefit.
Future Outlook
The focus for 2008 is to (i) establish its operating platform, and (ii) secure an anchor customer for the Appello solution. It is expected that customers, managing a total of $1 billion FUM, will be on the Appello platform by end of 2008.
Appello’s infrastructure has been proven through a proof-of-concept customer, who has already been secured.
III. NZX Group: Key Operating Metrics
NZX Markets Business – Operating Metrics
Total of number of trades
Average daily trades
Total value traded
Average daily value traded
Total number of NZX listed issuers
Number of data terminals
Total capital raised (primary and secondary)
Smartshares – Operating Metrics
Total Funds under Management (retail and wholesale)
Number of retail unit holders
Link Market Services – Operating Metrics
Number of holders
Number of issuers
IPOs won
Note: NZX Operating Metrics - Full Year 2007 are available at the following link: http://www.nzx.com/aboutus/news/press/metrics_dec07
AXE ECN – Operating Metrics
Market share
Number of shares
Value traded
TZ1 Carbon Market – Operating Metrics
Registry customers
Voluntary market trades
Compliance market trades (spot)
Compliance market trades (forward)
Open interest
Appello Services – Operating Metrics
Number of customers
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