New Zealand Exchange Limited's (NZX) third quarter result for 2005, announced today, is described by NZX CEO Mark Weldon as strong evidence that the NZX engine room (listings, trading, data) is working well, and that additional horsepower has been added to the NZX Group outlook by some very strong signs in the Link Market Services and Smartshares businesses.
His remarks are supported by a substantial operating EBITDA increase of 39% over the same quarter in 2004, achieved on operating revenue of $5.54 million. This represents an increase of 25% over the same period in 2004.
“NZX has been through a period of intense growth. This result reflects a focus on the execution and delivery phase of NZX's strategy, which is to drive and support the development of New Zealand 's capital markets, and to benefit from their growth and evolution,” said NZX Chairman Simon Allen.
“The two enterprises which NZX has invested in outside the core markets business – Smartshares and Link Market Services – are now through the initial start-up phase and are beginning to demonstrate the soundness of those investments,” Mr Allen said.
“NZX's core markets business performed well over the quarter. NZX continues to create value by driving depth and breadth in our markets through initiatives such as Direct Market Access, increased price transparency on both sides of the Tasman via third party arrangements, and the introduction of new product sets such as warrants. All these initiatives work to increase the level of operating leverage, which is one of the most attractive aspects of the engine room of NZX that is the markets business,” said Mark Weldon.
“NZX continues to derive value from the resulting increase in the volume and value of trades, and from slaking the markets' thirst for timely and accurate information.
“The additional horsepower for NZX's future results is the strong performance of Smartshares and Link, both of which form an integral part of NZX's strategy to contribute to the further development of New Zealand 's capital markets,” Mr Weldon said.
With Smartshares, NZX has provided investment products with features that have not been seen before in New Zealand . Link has begun to provide a level of competition and service in the registry space that have been limited until now.
“The contributions made by Smartshares – which won a New Zealand Superannuation Fund New Zealand equity allocation in August, and Link – which has now won its first major trans Tasman issuer in Westpac and expects to serve Goodman Fielder, reflecting sound execution of the strategy over this period, cement our expectation that these businesses will improve their value to the NZX Group significantly as they mature,” said Mr Weldon.
“NZX is engaged with many companies at varying stages in their evolution, and many of them are hungry to list as a means of gaining profile for their operations, changing their capital structure and providing for further growth,” said Mr Weldon.
“NZX will continue to inform, support and facilitate that process so that more New Zealanders have an opportunity to own a stake in a wider range of successful New Zealand businesses.
“On the basis of publicly disclosed intentions by companies to list or raise capital, with data revenues at higher levels, and with Link being successful in securing a good percentage of upcoming IPOs, NZX would expect to see this strong performance to be sustained through the fourth quarter of 2005,” Mr Weldon said.
Part II – Key Financial Results
- Operating EBITDA (excluding non-recurring expenditure): $2.51 million versus $1.81 million for the third quarter of 2004, an increase of 39% driven by listing activity, the impact of market data re-pricing, and a continued focus on cost control.
- Operating revenue (excluding interest income): $5.54 million, versus $4.43 million for the third quarter of 2004, an increase of 25%.
- Operating expenses (excluding non-recurring items): $3.02 million, versus $2.62 million for the third quarter of 2004, an increase of 15%.
- EBIT: $2.19 million, versus $.98 million for the third quarter of 2005, an increase of 123%.
Part III – Results Commentary and Notes
A. NZX Markets Business
Strong growth in high margin revenue from listings and market information sales, combined with a focus on cost management, led to a strong third quarter result from NZX's markets business.
“Listings, transactions, and market information are the key revenue drivers of the markets business,” said Mark Weldon. “For example, Vector's IPO created 40,000 new shareholders and raised $600 million in capital. These types of market events, combined with an increasing number of available products to trade, will drive long term value for the NZX markets business,” said Mark Weldon.
Revenue:
- Total revenue for the markets business reached $5.14 million for the third quarter 2005, an increase of 22% versus the third quarter of 2004.
- Listing revenues were $2.06 million, an increase of 29% compared with the third quarter of 2005. Initial listing fee revenue (charged to new issuers of securities) reached $540,000, an increase of $212,000 versus the third quarter of 2004. Year to date, listing revenues are up 10%.
- Market data revenue reached $853,000 versus $712,000 in the third quarter of 2005. This increase shows the impact of pricing changes to regularly charged data products and an increase in total product consumption.
- Average daily transactions reached 2,650 per day, an increase of 7% versus the third quarter of 2004. This increase, combined with pricing changes announced earlier this year, led to an 18% increase in transaction revenue.
Expenses:
- Operating expenditure for the markets business reached $2.71 million, an increase of 13% over the third quarter of 2004.
- Employee and Related Costs increased 16%, an increase largely attributable to growth in staff numbers during the second half of 2004. During the third quarter NZX made significant changes to its management team, resulting in the consolidation of roles and responsibilities.
- Information Technology expenditure is up 28%.
There were no non-recurring costs associated with the collapse of Access Brokerage over the quarter. Looking forward, NZX expects any further costs to be operational in nature. The various investigations, carried out by multiple parties in respect of Access Brokerage, have resulted in the Serious Fraud Office laying criminal charges against Access Brokerage Managing Director Peter Marshall, and the bringing of a
Statement of Case before NZX Discipline against Marshall and Access Brokerage. In addition, during the month of September, NZX was served with proceedings by the Bank of New Zealand and Access liquidator Ferrier Hodgson with regard to the collapse of Access Brokerage. NZX is insured in respect of this action and is defending this action and counterclaiming against the BNZ.
B. Smartshares
Smartshares operations resulted in an operating EBITDA gain of $23,000.
During the third quarter, Smartshares was awarded a passive mandate to manage the New Zealand Superannuation Fund's New Zealand equity allocation. Smartshares has committed significant resource to this important piece of business, and will continue to do so until year end. New fund launches will take place in 2006.
“Smartshares will focus on becoming the dominant passive manager in New Zealand for retail and institutional investors. Our unique passive investment-only operating model provides a low cost and low fee choice for retail and institutional investors,” said Smartshares Head of Business Geoff Brown.
“We will continue to invest in infrastructure and marketing to ensure that investors continue to avail themselves of the advantages offered by Smartshares and their uptake begins to mirror that in overseas markets, where the American Stock Exchange alone offers 148 ETFs, and European exchanges offer 250.
“In addition, we believe Smartshares is well positioned to contribute to, and derive value from, increasing savings rates in New Zealand,” Mr Brown said.
Total funds under management at 30 September 2005 reached $204 million. Smartshares has 10,463 investors direct on register.
C. Link Market Services Limited
Link Market Services delivered an operating EBITDA result of $86,000.
Link serves 108 issuers in New Zealand , including Westpac Banking Corporation. Link expects to serve the forthcoming Goodman Fielder float, and is poised now to target major New Zealand issuers with Australian and New Zealand registry requirements.
Link is completing the integration of BK Registries, and will operate a single technology system within the next six months. This migration will improve service levels to existing clients, and will also deliver operational efficiencies.
Link's contribution to the NZX Group is treated as an equity investment in the NZX Group result. Link's third quarter loss after tax was $15,000, due to amortisation and depreciation expenses. This results in a $7,500 negative contribution to the NZX Group operating revenue.
NZX expects that the costs associated with the initial investment, and integration of BK Registries into Link, will be fully absorbed by the end of 2005, with a positive equity contribution to NZX in 2006.
D. Conclusion
“NZX's markets business delivered a strong third quarter performance. We are confident that signs of a maturing capital market structure in New Zealand will continue to drive growth in our core businesses and deliver positive returns to shareholders from our investments in Smartshares and Link Market Services,” said Simon Allen.
“NZX continues to seek investment opportunities while maintaining a tight focus on delivering value from its core markets business,” Mr Allen said.
The Statement of Financial Performance can be found on the NZX website at www.nzx.com/aboutus/investor/financial.
NZX will release its preliminary full year results for 2005 on Friday, 17 February 2006. NZX's dividend policy will be released at that time.
