Bloomberg News

TMX Trailing Exchange Peers as Volume Slumps: Corporate Canada

August 01, 2013

TMX Group Ltd. (X) is the worst-performing exchange stock in North America this year, as a rout in global commodity prices cuts equity trading volume and a bank-led competitor prepares to enter the business.

Shares of Toronto-based TMX have dropped 7.6 percent in 2013, the only decline among a group of six North American exchange providers including NYSE Euronext and Nasdaq OMX Group Inc. (NDAQ:US), according to data compiled by Bloomberg. The top performer, Chicago-based CBOE Holdings Inc. (CBOE:US), has gained 72 percent in the same period.

TMX rose 3.7 percent to C$46.89 at 4 p.m. in Toronto, the highest close in seven weeks.

The owner of the Toronto Stock Exchange, TSX Venture Exchange, and Alpha and TMX Select trading platforms, posted a 17 percent slide in stock-trading volume through the first half of the year as investors exited the resource-dominated Standard & Poor’s/TSX Composite Index. (SPTSX) The company today reported second-quarter profit that topped analysts’ estimates after higher listing fees boosted revenue.

“It’s well known that trading is down in the TSX and on the sell side every day we live with that,” Ed Sollbach, a strategist with Desjardins Securities Inc. in Toronto, said in a telephone interview July 30. “A lot of it is because the TSX is 40 percent energy and materials. People chase performance, and the U.S. market is one of the strongest markets globally, so that helps them.”

The benchmark S&P/TSX has risen 1.3 percent this year, compared with a 20 percent advance in the S&P 500. (SPX)

Net Income

TMX’s net income was C$25.5 million ($24.8 million), or 47 cents a share, the company said today in a statement. Revenue was C$182.3 million. The numbers from a year earlier aren’t strictly comparable because a new company was formed by the sale of the exchange owner to a group of banks and pension funds.

The company reported profit of 89 Canadian cents a share excluding some items, beating the 83-cent average estimate of analysts surveyed by Bloomberg.

TMX’s equity exchanges have traded about 73.4 billion shares valued at C$764.1 billion this year, compared with 88.4 billion shares for C$868.8 billion a year ago, company data show. In Canada, TMX had about 82 percent of equity trading by volume as of June, according to data from the Investment Industry Regulatory Organization of Canada in Toronto.

Maple Group Acquisition Corp., a collective including Toronto-Dominion Bank, Canada Pension Plan Investment Board and Manulife Financial Corp., acquired the former TMX Group Inc. along with Alpha Trading Systems and the Canadian Depository for Securities Ltd. in a C$3.73 billion deal that closed in September.

Rival Exchange

Royal Bank of Canada, Canada’s largest bank, along with five partners including Barclays Plc and CI Financial Corp., announced in June the creation of Aequitas Innovations Inc., which will operate a stock exchange to compete directly with the TSX.

Joanne Kearney, a spokeswoman for Aequitas, said the company will apply for regulatory approval with the Ontario Securities Commission in late autumn and expects to be in operation by late 2014.

Shares of TMX dropped 2.3 percent when Royal Bank announced Aequitas on June 25, falling to the lowest close since the company began trading in September after completion of the Maple Group acquisition. The shares rose 1.2 percent to C$45.20 in Toronto yesterday.

“We are a strong domestic and international competitor,” said Tom Kloet, Chief Executive Officer with TMX, in a conference call this morning. “We’ve faced new competition for a long time now. It’s a fact of life. We’re prepared to compete effectively. Our focus will be on providing leading technology and innovative products, and competitive pricing.”

Commodity Crunch

Thomas Caldwell, Chief Executive Officer with Caldwell Securities Ltd., said Kloet will respond to any threats of competition.

“If Aequitas comes up with something that will take business away from them, make no mistake, Tom will act,” Caldwell said on the phone from Vancouver. The Toronto-based firm manages about C$1 billion, including shares of TMX. “The Toronto Stock Exchange still has the high ground on this, and they will come up with something. This is not necessarily a race to the bottom on fees.”

Raw-materials producers in the S&P/TSX have slumped 31 percent so far in 2013, worst among 10 industries. The price of gold has plunged 22 percent and is poised for the first annual decline since 2000 as investors gain confidence in the U.S. economic recovery.

China Slows

An economic slowdown in China, the world’s largest consumer of raw materials, has caused a bear market in commodities from copper to silver. Gross domestic product in China will probably expand 7.5 percent in 2013 and 2014, compared with 7.8 percent growth in 2012 and 10.4 percent in 2010, and further decline to 7.2 percent in 2015, according to economists surveyed by Bloomberg.

Resource stocks, including gold miners and oil producers, make up about 37 percent of the index, compared with about 13 percent for the S&P 500.

“Volumes are down remarkably for everyone, with the market flattish there are not a lot of initial public offerings or financings,” said Irwin Michael, fund manager with ABC Funds in Toronto. His firm manages C$800 million. He does not own TMX. “We believe the economy is slowly getting better, and there’s opportunity in the marketplace, but there’s a lot of reticence.”

U.S. Climbs

U.S. markets have climbed this year amid a recovering economy and stimulative monthly bond purchases of $85 billion by the U.S. Federal Reserve. Volume across the U.S. exchanges has fallen 5.8 percent in the same period, Bloomberg data show.

“The U.S. market overall is up, which will help, and you’ve seen decent trading volumes as well as earnings growth for these players,” said Chris Allen, an analyst with New York-based Evercore Partners Inc. “Then there’s perception of future activity moving forward, particularly names with interest rate sensitivity or growth products like the volatility index VIX at CBOE.”

TMX is trading at a 8 percent discount relative to its five-year average price-earnings ratio, compared with a 15 percent premium for its peers, estimated Phil Hardie, Toronto-based analyst with Scotia Capital Inc., in a July 17 note.

TMX has been a thinly traded stock since its acquisition by the Maple Group in September, with average daily trading volume of 56,430 shares. This compares with an average daily volume of 408,506 shares in the two years prior.

Financing Activity

“The steeper discount likely reflects a relatively more constructive outlook for U.S. and European markets, while the resource-oriented Canadian markets are likely to remain more subdued,” Hardie said.

Shubha Khan, an analyst with National Bank Financial, lowered his rating for TMX to underperform, the equivalent of a sell, in a note to clients on July 18.

Khan, who estimated second-quarter profit of 69 cents, down from an earlier forecast of 84 cents, also lowered his 2013 outlook for earnings to C$2.93 from C$3.15.

“Several factors are weighing on TMX Group’s earnings growth, including the likely entry of a rival Canadian exchange in late 2014, lackluster trading activity in all asset classes, weak equity financing volumes and steep market share losses for the BOX,” Khan said, referring to TMX’s Boston Options Exchange. “Financing activity will remain relatively weak for the balance of the year.”

Global Player

Sang Lee, managing partner and co-founder of Boston-based Aite Group LLC, said TMX is still working through issues and finding cost savings related to its integration of businesses including Alpha Trading Systems last year, and the stock has the potential to improve.

“As things get sorted out and the market outlook becomes a bit more clear, even in a low-trading environment their overall performance will be a lot better,” Lee said. “They need to hold onto their market share domestically on the equity side, and that is the hard part.”

For TMX to grow, the company will likely need to expand into other markets in the U.S. or overseas, either through acquisitions of smaller U.S. equity firms or by becoming a takeover target by a larger global player.

“LSE would have been interesting,” Lee said, referring to a failed bid by the London Stock Exchange to acquire TMX in 2011.

ABC Funds’ Michael is skeptical either Aequitas or TMX will find much success given the current market conditions.

“You can have more competition for trading, but the problem is we’re all doing less trading,” Michael said. “That’s more competition for less business and it’s a challenging situation for everyone.”

To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net


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