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NZX today reported its full year financial results for the year ended 31 December 2013, which was a record year for Initial Public Offerings and equity trading activity.
Revenues for the year of $62.8 million were up 12.2% on the previous year. As well as the very strong performance of NZX’s capital markets businesses, additional revenue from market operations activities, including NZX’s operation of the Energy markets and the Fonterra Shareholders’ Market, contributed to the revenue growth.
This positive performance was partly offset by the impact of the worst drought in 70 years on NZX Agri’s performance, and the timing of grain trading through the harvest in Australia.
NZX CEO Tim Bennett commented: “Activity in New Zealand’s capital markets in 2013 was at its highest in a more than a decade which clearly has a direct and positive impact on NZX’s financial performance. Driving this activity is what we consider are structural changes in the market, including the growth of KiwiSaver, and a more positive New Zealand and global economic environment.”
“To support these changes, NZX is continuing to invest in building a strong foundation from which to grow the business, and to support the growth of New Zealand’s capital markets in the long term.”
** Reported results are summarised in the table in the announcement attached.
Included in 2013 reported Net Profit After Tax was an impairment expense of $2.6 million ($2.0 million net of tax). Of this, $2.4 million was to reduce the carrying value of the Group’s investment in the Clear Grain Exchange and $0.2 million to write down the NewsRoom brand asset.
Included in 2012 reported Net Profit After Tax was a foreign exchange loss of $1.5 million on the realisation of the Group’s former investment in Markit.
Business Highlights
Capital markets
NZX’s capital markets businesses performed strongly in 2013. Revenue was up 18.2% to $35.0 million. Initial Public Offering activity in 2013 was at a 10 year high, resulting in new capital listed of $7.5 billion. The 10 new listings comprised a broad range of company sizes and industry sectors, comprising Airwork Group, GeoOp, Meridian Energy, Mighty River Power, SLI Systems, Synlait Milk, Snakk Media, Wynyard Group, Z Energy and the reverse listing of Mad Butcher via Veritas.
The listing fees associated with this IPO activity have contributed to NZX’s current year results, and will also provide recurring annual listing, trading and clearing revenues.
NZX CEO Tim Bennett commented: “The level of IPO activity in 2013 is of long-term benefit to New Zealand’s capital markets. It adds greater depth to the market, a broader range of investment opportunities for New Zealanders and, particularly in the case of the Government share offers, brings new investors into the market.”
NZX’s securities data revenues were down 0.9% to $8.9 million. This was due to primary data distributors declining 7.7% during the year to 24. However, real time data terminals increased by 6.0% to 7,291, further demonstrating the renewed interest in New Zealand’s capital markets.
Securities trading revenue increased 34.4% as the number of trades increased 32.0% and total value traded increased 39.6% compared to the prior year. This buoyant capital markets activity drove growth in NZX’s Clearing House and Depository business with gross value of cleared trades over the period up 40.0% to $42.4 billion. Stock lending activity also grew strongly, up 28.3% to $2.8 billion.
The market performed strongly during the year, with the NZX 50 Index up 16.5% to 4,737.
Soft commodities
NZX’s Dairy Derivatives business continued its growth trend in 2013, with the number of lots traded up 52.0% to 36,748, and open interest at 31 December 2013 up 316.4% to 9,070. While this business is still in the early stage of its lifecycle, it has considerable long term potential.
In early 2014, the US regulatory agency the Commodity Futures Trading Commission (CFTC) registered NZX as a Foreign Board of Trade under the US Commodity Exchange Act. The registration allows NZX to permit direct access to participants in the US to trade NZX Dairy Derivatives on NZX’s trading platform, significantly increasing the available market. Whole Milk Powder, Skim Milk Powder and Anhydrous Milk Fat Futures, and Whole Milk Powder Options can be traded on NZX.
Tonnes traded on the Clear Grain Exchange were down 24.5% to 616,828 due to a significant amount of grain being sold earlier in the 2012/13 harvest cycle.
Agri information
2013 was a tough year for New Zealand’s agricultural sector with severe drought conditions across the country in the early part of 2013 and into Q2. This negatively impacted NZX’s Agri information business with revenue down 2.9% to $12.0 million. This comprised a decline in revenue on the prior comparable period of 7.6% in the first half of 2013 partly offset by a 1.8% increase in the second half as the sector recovered. Total paid advertising page equivalents were down 5.9% for the full year and dairy information subscriptions were down 2.0%.
However, there were a number of operational milestones achieved in the Agri business including a steady increase in visitors to Farmers Weekly Online and the launch of the Dairy Trader website dairytrader.co.nz.
Funds management
In NZX’s funds management business, Smartshares, funds under management was up 11.2% and units on issue up 4.5%.
Market Operations
Market Operations revenue was up 19.0% on the prior year to $11.9 million, benefiting from a full year of the operation of the Fonterra Shareholders’ Market. In addition, NZX’s energy business earned additional revenue through development contract work for the Electricity Authority. As previously signalled, the high level of development work performed by NZX’s energy business during the first half of 2013 returned to more normal levels in the second half.
Registry business Link Market Services, which is 50% owned by NZX, had revenue growth of 10.8%, which was offset in part by relocation costs.
Other developments
As well as focusing on delivering value in its existing businesses, NZX also progressed a number of growth initiatives during the period.
Initiatives underway include development of a new market aimed at small to medium sized businesses that wish to raise new capital and/or provide liquidity to shareholders. Recent structural changes in the capital markets, such as the introduction of the Financial Markets Conduct Act and increased savings from a broad range of investors, have provided an opportunity to develop and launch a new, unique market targeted at these businesses.
The market will address a gap in New Zealand’s capital markets infrastructure between smaller private markets, such as angel and venture capital, and the NZX Main Board, which is targeted at larger, more established businesses.
Other initiatives include development of Equity Derivatives, and new Exchange Traded Funds in NZX’s Smartshares business.
Costs
The growth in expenses was largely driven by the following factors:
• The full year impact of staff hires made at the end of 2012
• A reduction in staff capitalisation
• Additional IT costs resulting from the refresh of non-core systems and the full year impact of the NASDAQ X-stream trading platform launched in 2012
Staff numbers at 31 December 2013 were up 4% compared to a year earlier.
Legal costs during the period in relation to the ongoing dispute with Ralec were $0.8 million.
Write-down of investments
NZX reduced the carrying value of its Australian business Clear Grain Exchange by $2.4 million to the assessed fair value of $4.7 million. 2013 was a disappointing trading year for the Clear Grain Exchange which saw revenues fall 22.4% compared to the prior year.
In addition, as the market has evolved, it has become evident that growth in volumes outside Australia’s East Coast will require different operating models which will take longer to implement. A number of management changes were made to the business at the end of last year to better capture these opportunities.
The consequence of the above factors resulted in forecast cash flows that were no longer able to support the carrying value of the asset, necessitating the recognition of the impairment charge.
Outlook for 2014
In NZX’s capital markets business, 2014 IPO activity is expected to be focused on smaller to medium size listings compared to 2013. Securities trading/clearing volumes are expected to remain robust and will benefit from the flow on effect of listings and sell-downs of strategic holdings during 2013.
For soft commodities, the profile of 2013/14 grain harvest has followed a similar pattern to 2012/13, with large volume of sales early in season and limited grain now remaining in silo, suppressing the potential trading volumes in Q1 to Q3 2014.
Dairy derivative volumes are expected to continue their strong growth, but from a very low base. Equity derivatives are planned for launch in late March 2014, subject to final systems testing.
Improvement is expected in the Agri information business as the impact of the 2013 drought is now behind the sector. Forward bookings for advertising in rural publications are currently ahead of where they were at the same time in 2013.
In NZX’s funds management business, the launch of two new funds management products in 2014 is anticipated to drive growth in funds management beyond 2013 levels.
Finally, in market operations, the gas contract ($670k of revenue) ceased at 31 December 2013. Energy consulting revenues are expected to be at similar levels to 2013 if a major settlement project goes ahead in 2014.
NZX CEO Tim Bennett commented: “The medium term growth opportunities are significant across most of the businesses that NZX is involved in. In the capital markets, the impact of KiwiSaver and an increased savings rate is underpinning a structural shift in the supply of capital.”
“Coupled with this, the Financial Markets Conduct Act provides the flexibility to introduce different types of marketplaces. In addition, the opportunity to develop a meaningful derivatives business remains a key area of focus for NZX.”
“The growth in KiwiSaver is also anticipated to result in double-digit growth in funds under management in New Zealand – NZX is currently the sole provider of exchange traded funds in New Zealand, which are significantly underrepresented in the investment environment here relative to overseas.”
“Long term, agricultural exports are expected to increase at around twice the rate of gross domestic product–NZX is well positioned to participate in this growth through our soft commodities and agricultural information businesses.”
Dividend
The NZX Board has declared a final dividend for the full year of 1.6 cents per share, fully imputed, in accordance with the existing dividend policy.
The dividend record date will be 7 March 2014 with a payment date of 21 March 2014.
A new dividend policy will be effective from the beginning of the 2014 financial year, which is to target a distribution of 80% of free cash flow, subject to the commitments of NZX and the usual constraints of working capital and solvency requirements. In transitioning to this policy, the Board has indicated that it intends to pay total dividends of 6.0 cents per share in respect of the 2014 financial year (subject to no material adverse changes in circumstances). It is expected that dividends will be fully imputed. NZX will also revert to the more conventional approach of paying half-yearly dividends.
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