TMX Group Ltd. is outperforming its global peers this year as investors visit a glimmer of a turnaround in the Canadian exchange operator as it tries to diversify beyond its traditional resource base.
Shares of Toronto-based TMX, which owns and operates the Toronto, Venture and Alpha stock markets, plus a securities clearing house and derivatives markets, are up 8.6 percent this season, outpacing 26 peers within the Bloomberg World Exchanges Index, including London Stock Exchange Group Plc and Nasdaq Inc.
The nascent rebound may come as Chief Executive Officer Lou Eccleston, 58, fights back from an almost 30 per cent slump within the operator’s shares last year with plans to regain equity-trading market share, invest in services such as data analytics and cattle trading, and change its struggling junior Venture exchange.
“Since 2014, when Lou Eccleston originates in, it’s had a strategic shift with a bit more of the concentrate on as being a technology-solutions company and monetizing all of the data which comes out of its listings business, which 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 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 along with a former executive at Bloomberg News parent Bloomberg LP, introduced the AgriClear cattle-trading platform last year along with a intend to create a data-analytics service to give clients tools to investigate information from the trading operations. The company 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 oversee TMX’s equity listings and trading activity, that have plummeted amid the country’s slumping resource market.
Thadaney has his work cut out for him. The company’s benchmark equity gauge, the Standard & Poor’s/TSX Composite Index, fell 11 percent this past year amid a transition from its legacy of one’s and mining companies. Companies from outside the natural-resources industry composed the greatest percentage of new listings because the technology boom of 1998, based on TMX data published 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, based on TMX data. Trading around the Venture, that is dominated by junior resource companies, fell 28 percent and now makes up only 15 percent of all 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 will also be off and away to the weakest begin to the entire year in Two decades. Not a single company has indexed by Canada this season as of Feb. 8, according to data compiled by Bloomberg. Total financings, including secondary and supplemental issues in addition to listings of Exchange Traded Funds, dropped 33 percent in January to $1.6 billion compared with a year ago, TMX data showed.
“By measure, the TSXV has deteriorated precipitously in the past 5 years,” Ian Russell, ceo of the Investment Industry Association of Canada, said in 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 increase liquidity and diversifying listings. It will hold town hall meetings with clients across Canada at the begining of 2016 to generate ideas, the organization said in a release.
The bourse operator can also be feeling the heat of competition. Its market share in Canada, based on volume of shares traded, slid to 67 per cent at the end of 2015, from about 80 per cent in 2013, according to IIROC industry data.
New competitors this past 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 in 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 organization a hold. The stock also has a sell, with no buys.
Yield Play
“To date, there’s been more plan than execution,” said Paul Holden, an analyst at Canadian Imperial Bank of Commerce World Markets, inside a phone interview from Toronto. He rates TMX a hold. Holden lowered his price target for TMX stock to $50 from $58.50 whilst cutting his earnings estimates for 2016 and 2017 inside a Feb. 8 note to clients.
The stock remains one of the cheapest on the Bloomberg World Exchanges Index, when measured by its price-earnings ratio. It trades at approximately 13 times earnings, in contrast to the 21.1 average of their peers in the gauge.
It has some relative stability in an uncertain market while paying an attractive 4 per cent dividend yield, Mawer’s Senyk said.
“We have some confidence but we don’t understand what things may be 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.”
Bloomberg News
