JSE’s diversification pays dividends
It has reliable cash flows, a strong balance sheet and various income streams but there are challenges for the stock exchange operator
The JSE Ltd*, which operates the local stock exchange and other markets, is in the position of having a dividend yield that is higher than its earnings multiple.
At the time of writing the JSE’s yield was sitting at a sumptuous 9% with the earnings multiple at around 8.5. The yield is not far off the 10.87% for the Satrix Divi Plus exchange traded fund and British American Tobacco’s 10%.
The JSE’s current rating, taken in isolation, would usually be symptomatic of a counter that is going ex-growth.
With the core equity market in a funk for the past 18 months, most casual observers would think the JSE would be hardpressed just treading water for the financial year ended March.
Well ... yes and no. The highlights package for the JSE will show headline earnings increased 12% to R10.29 with net profit after tax shimmying up 11% to R831m. Top-line growth was a decent 7% to R2.9bn but earnings before interest, tax, depreciation and amortisation (ebitda) dipped 2.3% to R1.1bn.
Bottom-line growth, in reality, came courtesy of higher interest rates as the JSE’s sizeable cash pile earned 66% more in net finance income to R169m.
There might be some debate on whether a 2.3% dip in ebitda is commendable in this economic environment but the more important consideration is that the JSE’s cash generated from operations was up 14% to R1.1bn. This meant the group could escalate its generous dividend payout, declaring a 784c a share (previously 769c) gross payout for the year. Finicky shareholders might, however, note that the payout ratio of 82% is down on the previous year’s 89%. With equity markets still looking as iffy as ever, the ex-growth or low growth ranking accorded to the JSE might still seem reasonable. But a worthwhile exercise is looking at the breakdown of the JSE’s revenue line.
The big gains in revenue during the financial year came from a 15.6% increase in Information Services and a 20.2% increase in JSE Investor Services (JIS). JSE CEO Leila Fourie pointed out that the JSE increased the proportion of its revenue derived from nontrading activity with “nontrading income” topping R954m, or almost a third of total revenue.
Broadly speaking, the JSE’s posttrade services account for 34% of revenue, with Capital Markets representing 38%. Information Services is now up to 17% of top line, with JIS at 7% and JSE Clear 4%. The two biggest segments are also worth unpacking further. Under R1bn-plus capital markets, it was only the core Equity Market portion that went backwards but surprisingly, considering the dour local investment mood, only by 6% to R486m. Bonds and Financial Derivatives was up 16% to R129m with Commodity Derivatives up 12% to R80m. Equity Derivatives and the Primary Market, at R117m and R161m respectively, were up by a whisker.
It is interesting to see that the JSE’s Information Services that being market data and indices is, at R448m, already bigger than Equity Clearing and Settlement and not far off Equity Market trading.
The makeup of the JSE’s revenue line coupled with the distinct possibility that nontrading service income will increase its collective contribution in the years ahead makes it reasonable to view the JSE as a specialised financial services counter rather than a markets operator. More excitable punters might even be tempted to slap the fintech tag onto the JSE.
With reliable cash flows, a strong balance sheet and diversified income streams, the JSE might look good value at current levels.
But the group has several challenges. At the investor presentation there was a strong hint the JSE could be “leaner and meaner”. Opportune Investments chief investment officer Chris Logan and former stockbroker Martin Lowenthal raised concerns about the JSE’s personnel cost rising to almost 28% of revenue from a figure of 23% in 2018. Logan has subsequently noted that personnel costs make up only about
14% of revenue for the Australian Stock Exchange, which is bigger than the JSE.
In the investment presentation, the JSE disclosed that personnel costs were up 13% (or R91m) to R784m attributing this to annual salary increases, higher incentives owing to good leavers and retention costs during the year as well as a lower longterm incentive scheme vesting in the prior year. There was also the additional cost of bringing staff from the recently acquired JIS onto the JSE’s books.
The growing issue of competition was also raised, with the rival A2X stock market which offers a secondary market in numerous larger JSE shares seeing increased trading volumes.
Last week fashion retailer Pepkor opted for a secondary listing on A2X joining other big-name retailers including DisChem, Mr Price, Clicks, Truworths, Pick n Pay, Shoprite and Woolworths.
A2X now hosts 18 companies with a combined market capitalisation of about R9.1-trillion, roughly half the JSE’s collective market value.
Lowenthal argued: “Every trade we lose at A2X is a disaster ... sometimes up to 50% of some of the bigger [JSE] stocks takes place on that market.”
Fourie provided some context by pointing out that A2X had seen its highest average daily trading last month at about R730m, against the JSE trading anything between R15bn and R20bn a day. “We don’t focus our efforts on what the competition is doing. We are really looking at how we can improve our services, make ourselves more innovative and be more cost-effective to clients.”