Integration And Platform Transition Expected To Unlock Operating Efficiencies

Key Takeaways

• Integration of recent acquisitions and platform transitions aim to reduce costs, enhance efficiencies, and improve net margins.
  
• Growth in capital markets and dairy derivatives, backed by positive regulatory and market trends, is expected to boost revenue.
  
• High inflation and interest rates are dampening investor sentiment, squeezing revenue growth, and pressuring margins through decreased trading fees and reduced capital raising.

Catalysts

Operates a stock exchange in New Zealand.

• The integration of recent acquisitions such as QuayStreet into Smartshares is expected to unlock operating efficiencies, enhance client service offerings, and yield cost synergies by reducing reliance on third-party services, which should positively impact net margins.
  
• The transition of Smartshares and QuayStreet products onto NZX Wealth Technologies' platform is set to reduce external costs, lower technology risk, and provide potential for further operating efficiencies, driving improved net margins and overall profitability.
  
• The continued onboarding of new clients onto NZX Wealth Technologies, alongside positive net cash flows and market returns, is expected to drive significant growth in Wealth Technologies' fund under administration, thereby boosting revenue and enhancing operating leverage.
  
• A positive outlook in capital markets activity, driven by potential regulatory improvements and a peak in interest rates, could support increased trading volumes and secondary market transactions, ultimately enhancing revenue.
  
• Strong growth in dairy derivative market volumes and the potential expansion of product offerings, as well as leveraging international partnerships, are expected to drive revenue growth, capitalizing on global market opportunities.

NZX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NZX's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.5% today to 17.3% in 3 years time.
• Analysts expect earnings to reach NZ$23.8 million (and earnings per share of NZ$0.07) by about February 2028, up from NZ$21.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2028 earnings, up from 23.0x today. This future PE is greater than the current PE for the NZ Capital Markets industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

NZX Future Earnings Per Share Growth

Risks

• Continued high inflation and elevated interest rates have made equity markets less attractive, impacting investor sentiment and potentially reducing future revenue growth opportunities.
  
• Capital Market revenues were slightly down, and trading and clearing fees decreased by 3%, which could pressure net margins if this trend continues.
  
• Reduced interest margin revenues shared with SGX due to a change in the interest rate forward curve could negatively impact earnings if not adjusted in future periods.
  
• The decline in capital raised, down by 11.5% compared to the corresponding period last year, along with pressures on company earnings, could further strain revenue prospects.
  
• The reassessment of the QuayStreet earn-out liability indicates challenges in meeting net cash inflow targets, potentially impacting reported earnings if the trend continues.

Valuation

• The analysts have a consensus price target of NZ$1.69 for NZX based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$137.1 million, earnings will come to NZ$23.8 million, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of NZ$1.54, the analyst price target of NZ$1.69 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.