TMX Group Ltd (TSX: X), the owner of the Toronto Stock Exchange, provides listing, trading, clearing, settlement, depository and information services for an array of publicly and over the counter traded financial instruments.
It recently reported first quarter results. (See my previous article on TMX here.) The main sources of the $701 million 2013 revenue were listing services for equities and fixed income, trading, clearing and settlement for equities, fixed income, derivatives and energy products, and data information services.
The main trading and settlement platforms provided by the company include the Toronto Stock Exchange (main equities exchange), Montreal Exchange (financial derivatives) and CDS (securities clearing, depository and settlement).
The early 2014 signs are promising
Expectations are that the company will be able to grow its profits considerably during 2014 based on the estimated 2014 cost savings, integration synergies and increased listing, capital raising and trading market activity.
The early signs in 2014 are promising with increased listing, capital raising, and trading activity reported in the first quarter of 2014. In a recent trading update TMX announced that the total financing raised (including IPOs, primary, secondary, and supplementary finance) on the Toronto Stock Exchange during the first quarter of 2013 increased by 57.8% compared to a year ago.
Trading activity is also increasing rapidly, with the total number of transactions in the first quarter up by more than 20% compared to a year ago while the volume and value of trading also increased by 9% and 6% respectively.
First-quarter results should be good
The results for the first quarter, expected on May 9, should make for pleasant reading for shareholders. The current consensus earnings per share expectation is $0.84 on an adjusted basis, which will be 20% ahead of the first quarter of 2013. The increase in profits is expected to come from the higher business activity as well as cost savings driven by the combination of trading platforms and the realisation of efficiencies of overlapping functions.
For income investors, there is the prospect of another juicy dividend, which may be increased at some point during the year for the first time since 2010. The profit of the business is growing, the balance sheet is solid, and the cash flow is healthy – all supportive of an increased dividend. The dividend yield on the current price is an attractive 2.9%.
TMX is still undervalued compared to other stock exchanges
TMX is an integrated exchange that can be compared with some of major stock markets such as the Singapore Exchange, Nasdaq Stock Market, London Stock Exchange, and the Australian Securities Exchange. On most of the valuation measures suitable for this type of business, TMX seems to be undervalued by 10-20% especially when the 2014 cost savings and positive profit prospects are taken into account.
Foolish bottom line
The company is a Canadian market leader in the key segments that it operates and has built a valuable franchise that will be difficult for competitors to replicate. The main business activities of the company are showing healthy growth and first-quarter results should be good. Despite the solid recent share price performance, the current valuation of the stock is still at a discount to other major stock exchanges in other parts of the world.