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TMX Group Ltd. is outperforming its global peers this season as investors visit a glimmer of a turnaround in the Canadian exchange operator because it tries to diversify beyond its traditional resource base.
Shares of Toronto-based TMX, which owns and operates the Toronto, Venture and Alpha stock exchanges, along with a securities clearing house and derivatives markets, are up 8.6 per cent this year, outpacing 26 peers within the Bloomberg World Exchanges Index, including London Stock market Group Plc and Nasdaq Inc.
The nascent rebound may come as Ceo Lou Eccleston, 58, fights back from a nearly 30 per cent slump within the operator’s shares this past year with intends to win back equity-trading share of the market, invest in new products such as data analytics and cattle trading, and shake up its struggling junior Venture exchange.
“Since 2014, when Lou Eccleston has come in, it’s had a strategic shift having a little more of the concentrate on as being a technology-solutions company and monetizing all of the data which comes from its listings business, that has promise,” said Craig Senyk, fund manager with Mawer Investment Management in Calgary. His firm manages about $34 billion (US$24 billion), including shares of TMX. “It’s a fascinating strategic shift and we’re taking a wait-and-see approach on how they execute that strategy.”
Shane Quinn, a spokesman for TMX, declined to discuss the company’s stock performance or strategy, with the company set to report fourth-quarter earnings Feb. 11.
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Cattle Trading
Eccleston, previously chairman of S&P Dow Jones Indices and a former executive at Bloomberg News parent Bloomberg LP, introduced the AgriClear cattle-trading platform last year and a intend to develop a data-analytics plan to give clients tools to analyze information from the trading operations. The organization has also sold its Equicom investor-relations unit and weighed how to handle other ancillary businesses including its Box U.S. options exchange unit.
Eccleston hired Nicholas Thadaney from financial technology firm ITG Canada to supervise TMX’s equity listings and trading activity, that have plummeted amid the country’s slumping resource market.
Thadaney has his work eliminate for him. The company’s benchmark equity gauge, the conventional & Poor’s/TSX Composite Index, fell 11 percent this past year amid a transition away from its legacy of one’s and mining companies. Companies from outside the natural-resources industry composed the greatest percentage of new listings since the technology boom of 1998, according to TMX data compiled by Bloomberg.
Volumes Shrink
Still, trading activity has shrunk. Volumes across all TMX equities marketplaces fell 20 per cent in January from the year ago, according to TMX data. Trading around the Venture, which is covered with junior resource companies, fell 28 percent and today comprises only 15 percent of activity, based on historical data from the Investment Industry Regulatory Organization of Canada. That compares with 35 percent once the commodity bull market was in full swing in 2007.
Initial public offerings are also off to the weakest begin to the entire year in 20 years. Not a single company has indexed by Canada this year by Feb. 8, according to data compiled by Bloomberg. Total financings, which include secondary and supplemental issues as well as listings of Exchange Traded Funds, dropped 33 per cent in January to $1.6 billion compared with last year, TMX data showed.
“By measure, the TSXV has deteriorated precipitously previously 5 years,” Ian Russell, ceo from the Investment Industry Association of Canada, said inside a January letter towards the group’s members.
Venture Pain
TMX published a paper in December outlining its goals to revitalize the Venture including reducing costs, expanding the investor base to improve liquidity and diversifying listings. It’ll hold town hall meetings with clients across Canada at the begining of 2016 to create ideas, the company said inside a release.
The bourse operator is also feeling heat of competition. Its market share in Canada, according to amount of shares traded, slid to 67 percent at the end of 2015, from about 80 per cent in 2013, according to IIROC industry data.
New competitors last year included Aequitas Innovations’ Neo exchange, which secured its first listing in January, and Nasdaq, which claimed a foothold in Canada after closing on its purchase of Chi-X Canada a week ago.
“The stock looks oversold, but given competitive overhang and a challenging market backdrop and little in the way of sustainable near-term catalysts, we’re remaining around the sidelines,” Scotia Capital Analyst Phil Hardie said inside a Feb. 1 note to clients while lowering his 2016 and 2017 earnings estimates for TMX. He’s certainly one of four analysts who rates the company a hold. The stock also offers a sell, with no buys.
Yield Play
“So far, there’s been more plan than execution,” said Paul Holden, an analyst at Canadian Imperial Bank of Commerce World Markets, in a phone interview from Toronto. He rates TMX a hold. Holden lowered his price target for TMX stock to $50 from $58.50 while also cutting his earnings estimates for 2016 and 2017 in a Feb. 8 note to clients.
The stock remains one of the cheapest around the Bloomberg World Exchanges Index, when measured by its price-earnings ratio. It trades at about 13 times earnings, compared with the 21.1 average of its peers in the gauge.
It does offer some relative stability in an uncertain market while paying a beautiful 4 percent dividend yield, Mawer’s Senyk said.
“We’ve got some confidence but we don’t understand what things will look like on the other side,” Senyk said. “There’s potential within the data side. We can’t visit a scenario where it isn’t the dominant exchange in Canada. We’re not impatient.”
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