Launch Of 'Dark' Will Drive Future Capital Markets Activity

Key Takeaways

• Successful integration and organic growth in Smartshares and Wealth Technologies signal potential for improved future revenue streams and net margins.
  
• NZX Dark's performance and strategic rollouts could boost trading revenues and enhance net margins, driving overall revenue growth.
  
• Volatile market performance and increased expenses may pressure net margins and affect NZX's long-term revenue and profit forecasts.

Catalysts

Operates a stock exchange in New Zealand.

• Growing revenues from Smartshares show strong organic growth and successful acquisition integration, which could enhance future revenue streams and operating leverage.
  
• Wealth Technologies' increased ARR and the achievement of turning cash flow positive signal potential for future revenue growth and improved net margins as new clients transition to the platform.
  
• The launch and performance of NZX Dark, outperforming initial business case expectations, suggest potential for increased trading revenues and an enhancement of net margins due to its bespoke pricing structure.
  
• Strategic rollouts like relaunching the NZX20 Index Futures and improvements in regulatory competitiveness could boost capital markets activity, driving revenue growth.
  
• Expected increases in cash flows from the amortization of capital investments, particularly in Wealth Technologies, indicate potential for future earnings growth outpacing NPAT increases.

NZX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NZX's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.1% today to 20.4% in 3 years time.
• Analysts expect earnings to reach NZ$29.6 million (and earnings per share of NZ$0.09) by about March 2028, up from NZ$25.5 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 25.0x on those 2028 earnings, up from 20.5x today. This future PE is greater than the current PE for the NZ Capital Markets industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

NZX Future Earnings Per Share Growth

Risks

• Market performance may be volatile, affecting capital market activity and NZX’s revenue from listing and trading fees. This impacts revenue projections.
  
• Increased operating expenses, particularly from acquisitions and technology investments, could pressure net margins despite revenue growth.
  
• Wealth Technologies' client migrations are often delayed by factors beyond NZX’s control, potentially impacting the timing of revenue and causing cash flow variability.
  
• Reduction in revenue from dairy derivatives and other fee structures sensitive to global interest rate changes poses a risk to earnings stability.
  
• Regulatory and competitive changes may affect the sustainability of market leadership, impacting long-term revenue and profit forecasts.

Valuation

• The analysts have a consensus price target of NZ$1.79 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$145.2 million, earnings will come to NZ$29.6 million, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of NZ$1.6, the analyst price target of NZ$1.79 is 10.6% higher.
  
• 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.