OTC Markets Group — Gaining domestic and international traction

OTC Markets Group (US: OTCM)

Last close As at 27/03/2024

55.78

0.74 (1.34%)

Market capitalisation

661m

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Research: Financials

OTC Markets Group — Gaining domestic and international traction

OTC Markets Group’s (OTCM’s) Q318 results showed sound revenue growth, a pick-up in corporate client numbers and a further increase in the number of states granting Blue Sky recognition. The data-driven transparency and cost-effective proposition of OTCM’s premium markets can be seen to be gaining traction and we have increased our estimates. While fluctuations in market conditions may affect quarterly progress, the long-term scope for increased penetration of international and domestic companies could provide the basis for further estimate increases.

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Financials

OTC Markets Group

Gaining domestic and international traction

Q318 results

Financial services

15 November 2018

Price

US$32.40

Market cap

US$376m

Net cash ($m) at end-September 2018

26.1

Shares in issue

11.6m

Free float

61%

Code

OTCM

Primary exchange

OTCQX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.7

9.5

30.5

Rel (local)

8.3

15.1

24.6

52-week high/low

US$33.0

US$23.8

Business description

OTC Markets Group operates the OTCQX, OTCQB and Pink financial markets for over 10,000 US and global securities. OTC Link LLC, a member of FINRA, operates OTC Link ATS and OTC Link ECN, both SEC-registered Alternative Trading Systems. Approximately 85% of revenues are of a contract-based recurring nature.

Next event

FY18 results

March 2019

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

OTC Markets Group is a research client of Edison Investment Research Limited

OTC Markets Group’s (OTCM’s) Q318 results showed sound revenue growth, a pick-up in corporate client numbers and a further increase in the number of states granting Blue Sky recognition. The data-driven transparency and cost-effective proposition of OTCM’s premium markets can be seen to be gaining traction and we have increased our estimates. While fluctuations in market conditions may affect quarterly progress, the long-term scope for increased penetration of international and domestic companies could provide the basis for further estimate increases.

Year end

Revenue ($m)

PBT
($m)

EPS*
($)

DPS**
($)

P/E
(x)

Yield
(%)

12/16

50.9

16.9

0.90

1.16

35.8

3.6

12/17

54.7

18.4

1.06

1.16

30.6

3.6

12/18e

58.6

20.0

1.36

1.24

23.8

3.8

12/19e

61.3

20.9

1.38

1.27

23.4

3.9

Note: *Fully diluted and calculated after restricted stock award allocation. **Including special declared dividends of $0.60 for 2016 and 2017, and an estimated $0.65 and $0.67 for 2018 and 2019, respectively.

Q318 results

OTCM reported revenue up by 8% y-o-y. OTC Link (+16%) was helped by the contribution from the OTC Link ECN trading platform, which was launched at the end of last year. Although staff costs increased by 8%, reflecting additional headcount and increased compensation, overall expense growth was 3.5%, allowing pre-tax profits to increase by 16% to $5.3m. A lower tax charge in the quarter (18%) resulted in diluted EPS growth of 26% to $0.37. The quarterly dividend was maintained at $0.15 (increased from $0.14 at the Q218 stage) and a special dividend of $0.65 was announced (compared with $0.60 last year). The balance sheet remains strong, with net cash at the period end of $26.1m.

Market background and outlook

While estimates for global and US economic growth have been quite resilient, uncertainty over the outlook could impinge on corporate and investor confidence. However, OTCM has seen a pick-up in the number of corporate clients on its premium markets and sees good potential to extend its geographical reach (international companies already account for 65% of the OTCQX index constituents). Two states have been added to the list granting Blue Sky recognition to OTCQX and OTCQB, taking population coverage to c 50%. Building on this momentum, work continues to facilitate further recognition. While this does not have a direct linkage to revenue, it is positive reputationally.

Valuation: Estimates and valuation raised again

Our EPS estimates for FY18 and FY19 have been increased by 3.8% and 1.5%, respectively, and we have raised our fair value to c $34 versus $31 previously (see page 9).

Investment summary

Business-friendly markets generating subscription revenues

OTCM’s mission is to create better informed and more efficient financial markets. Sharing information on open networks creates transparency for investors, while investment in technology ensures that broker dealers are reliably connected, providing quotes on over 10,000 companies. For international and domestic corporate clients, OTCM’s markets are tiered by standards of disclosure (OTCQX, OTCQB and Pink) and provide access to public trading in the US at a cost-effective price, compared with a listing on a registered national securities exchange such as Nasdaq. Approximately 87% of OTCM revenues are earned on a recurring, contractual basis rather than being transactional in nature and include annual fees paid by corporate clients on the premium OTCQX and OTCQB markets, broker-dealer subscription fees and data fees for access to pricing and other information channelled through distributors such as Bloomberg. Between 2007 and 2017, revenues grew at a compound rate of 12%.

Valuation: Trading within P/E ranges for comparators

Comparing OTCM with global exchanges and leading information providers (given their subscription-based revenues), we note that it trades on slightly below the P/E averages for these peers for FY18 and slightly above for FY19, and well within the range of valuations for these periods. Based on our DCF analysis, assumptions giving a valuation in line with the current share price would include a discount rate of 10%, long-term cash flow growth of 4% and a terminal cash flow multiple of 17.2x. Taking our peer comparison and DCF model into account, we have increased our fair value from $31 to $34.

Financials: Estimates increased for second quarter running

We have increased estimates for FY18 and FY19 modestly following a similar increase after the Q218 results. At the EPS level, the increases are 3.8% and 1.5%, respectively. In terms of revenue, the main driver for the current year increase is the better than expected outcome in the OTC Link division, where increased equity market volatility and increased traction for the OTC Link ECN have been the key contributors.

Sensitivities: Macro and micro

From a macro perspective, the economic background will have a positive or negative influence on equity market trends including: investor sentiment towards international and venture equities, the flow of venture company IPOs, corporate interest in accessing liquidity in the US market, and volatility and trading volumes. A range of micro factors apply specifically to OTCM and its sector, and points to consider here include the following:

Regulation can have a positive or negative influence. For example, regulations facilitating online capital raising are expected to increase the pool of potential clients for OTCM, while regulation Systems, Compliance and Integrity (SCI) imposes costs to ensure compliance.

Competition for corporate clients comes from national securities exchanges and could increase if they were allowed to become specialised venture exchanges. For trading, competition includes Global OTC (ICE subsidiary) and direct trading between dealers.

Reliability of the group’s IT systems is important from a reputational and regulatory perspective, and OTC Link Alternative Trading System (ATS) has established a strong record of uptime.

Transparent, efficient and technically reliable markets

OTCM began to take its current form in 1997 with the purchase of the National Quotation Bureau (NQB) by CEO R Cromwell Coulson and a group of investors. NQB published the Pink Sheets, which were an aggregation in printed form of broker dealer quotes for securities traded off-exchange. Following the purchase, the new management team began the process of applying technology to the task of aggregating liquidity and increasing transparency. A platform providing real-time quotes was launched in 2003 and evolved into the current SEC-registered OTC Link ATS. Another platform, OTC Link ECN, was launched in 2017, providing dealers with alternative features including an order-matching engine – as opposed to the ATS, where quotes are displayed and messages delivered, enabling direct trades between dealers.

OTC Link ATS carries quotes in over 10,000 companies and has 97 active broker-dealer participants. In order to help investors assess risk exposure, the companies are organised into three tiers, with membership of each subject to levels of disclosure differentiated in terms of timeliness, quality and quantity of information provided.

OTCQX Best Market companies meet high financial standards, have recognised corporate governance standards and provide timely public disclosure. At end-Q318, there were 395 OTCQX client companies.

OTCQB Venture Market is intended to provide a public trading facility for developing companies that meet standards promoting price transparency and facilitate public disclosure. OTCQB companies must remain current in their disclosure and provide additional information for investors. At end-Q318, there were 953 client companies.

The Pink Open Market comprises those companies quoted on the OTC Link ATS that do not meet the standards of, or chose not to apply for, the premium markets. To help give some differentiation within this market, companies are further categorised into Pink Current Information, Pink Limited Information and Pink No Information.

In Q318, approximately 87% of OTCM revenues were contract-based and of a recurring nature, reflecting the subscription model that applies in the majority of its activities. As examples, OTC Link earns monthly licence, subscription and connection fees from broker-dealers to use OTC ATS Link; Market Data Licensing distributes data through companies such as Bloomberg, Thomson Reuters and Interactive Data Corporation in exchange for end-user subscription fees; and Corporate Services earns annual subscription fees from companies that join OTCQX and OTCQB markets.

Revenues grew at a compound annual rate of 12% between 2007 and 2017, with the most rapid growth seen in Corporate Services, which accounted for 41% of the total in 9M18 (Exhibit 1).

Exhibit 1: Gross revenue evolution and analysis

Source: OTCM. Note: *9M18 annualised.

Q318 results

In Q318, OTCM recorded gross revenue growth of 8.4% y-o-y. A stepping-up of trading volumes on OTC Link ECN, launched in December 2017, fuelled a near-25% increase in fees and rebates paid, which meant that net revenue growth was slightly lower at 7.7%. Cost growth was held to below 4%, allowing pre-tax profits to increase by 16%. The reduction in US corporate tax rate and a higher research and development tax credit claimed in respect of the 2017 tax year resulted in a lower tax rate of 18%. This left net earnings and diluted EPS more than 25% ahead of the prior-year period and 10% above the second-quarter level.

The quarterly dividend (40th consecutive payment) was maintained at 15 cents following an increase from 14 cents in the second quarter. A special dividend of 65 cents was announced, five cents above the prior-year level, an increase of 8%.

Exhibit 2: Q318 results summary

$000s (except where stated)

Q317

Q417

Q118

Q218

Q318

y-o-y
(% chg)

q-o-q
( % chg)

OTC Link

2,413

2,546

2,651

2,799

2,807

16.3

0.3

Market Data Licensing

5,505

5,445

5,842

5,830

5,763

4.7

(1.1)

Corporate Services

5,704

5,898

5,849

6,137

6,195

8.6

0.9

Gross revenues

13,622

13,889

14,342

14,766

14,765

8.4

(0.0)

Redistribution fees and rebates

(584)

(646)

(629)

(710)

(728)

24.7

2.5

Net revenue

13,038

13,243

13,713

14,056

14,037

7.7

(0.1)

Operating expenses

(8,448)

(8,591)

(9,163)

(9,060)

(8,745)

3.5

(3.5)

Income from operations

4,590

4,652

4,550

4,996

5,292

15.3

5.9

Other income / net interest

5

6

17

11

51

920.0

363.6

Income before provision for income taxes

4,595

4,658

4,567

5,007

5,343

16.3

6.7

Taxes

(1,107)

(1,742)

(820)

(1,020)

(958)

(13.5)

(6.1)

Net income

3,488

2,916

3,747

3,987

4,385

25.7

10.0

Diluted EPS ($)

0.29

0.24

0.31

0.34

0.37

25.5

9.7

Operating margin

35%

35%

33%

36%

38%

Tax rate

24%

37%

18%

20%

18%

Source: OTCM, Edison Investment Research

We have included the divisional analysis of revenues in Exhibit 2 and added subdivisional figures derived from management commentary in Exhibit 3. Apart from OTC Link ECN, the subdivisional revenue figures are based on figures given for absolute and percentage changes and are therefore indicative, given the potential for rounding errors.

As in the second quarter, OTC Link generated the fastest growth, at 16%, followed by Corporate Services and Market Data Licensing. As can be seen in Exhibit 3, the increase in activity on the ECN accounted for the majority of growth for the OTC Link division. Since launch, the ECN has enabled 29 existing OTC Link ATS subscribers and added seven new users. Otherwise, the division benefited from higher messaging volume associated with more active markets, reflecting volatility and interest in cryptocurrency and cannabis-related securities. The number of broker-dealer subscribers increased slightly, but this was offset by a reduction in the number of users of OTC Dealer software and individual connection fees.

For the Market Data Licensing division revenues (+5%), the main positive drivers were data licence and end-of-day pricing products, which both benefited from price increases and from new sales and higher reported users, respectively. These gains substantially outweighed lower advertising revenue following difficulties in integrating a third-party provider with the new OTCM website (this has now been largely resolved).

Corporate Services revenues increased by 9% including increases of 10% and 11% for OTCQB and OTCQX, respectively. Both markets benefited from a higher average number of companies, resulting from strong new corporate client wins. For OTCQB, a higher rate of client company retention and price increases for renewing subscribers at the beginning of 2018 were additional positive factors. OTCQX experienced a lower rate of compliance-related downgrades and also accrued accelerated revenues arising from M&A and when companies graduated to exchanges or cancelled for other reasons.

Exhibit 3: Indicative subdivisional revenue analysis

$000

Q317

Q318

Absolute change

% change

% group

OTC Link

ECN

0

284

284

N/A

2%

Trade messages

708

793

85

12%

5%

Other

1,705

1,730

25

1%

12%

Total

2,413

2,807

394

16%

19%

Market Data Licensing

Advertising

112

30

-82

-73%

0%

Non-professional users

383

406

23

6%

3%

End of day pricing product

455

605

150

33%

4%

Data licence products

561

735

174

31%

5%

Other

3,994

3,987

(7)

0%

27%

Total

5,505

5,763

258

5%

39%

Corporate Services

OTCQB

2,780

3,058

278

10%

21%

OTCQX

1,873

2,079

206

11%

14%

Other

1,051

1,058

7

1%

7%

Total

5,704

6,195

491

9%

42%

Group gross revenues

13,622

14,765

1,143

8%

100%

Source: OTCM, Edison Investment Research. Note: subdivisional revenue numbers are inferred from the absolute and percentage changes reported but are only indicative because of rounding effects.

Exhibit 4 provides a summary of OTCM’s operating data and derived revenue measures. We highlight the following points:

The number of active participants for OTC Link increased slightly for the second quarter running, marking a stabilisation of the downward trend seen previously (from 133 in 2012) as broker dealers consolidated or withdrew in the face of pressures including increased automation/commoditisation of services and the costs of regulatory compliance.

The number of companies on OTCQX rose by over 11% y-o-y and 8% sequentially. As noted, a good level of sales was combined with lower compliance downgrades this year, following the increase seen in 2017 linked to changes in eligibility standards that took effect at the beginning of that year. International companies accounted for a significant part of the sequential growth in this quarter and this is seen as an important area for development (see outlook section).

Exhibit 4: Operating and related revenue data

Q317

Q417

Q118

Q218

Q318

y-o-y
% chg

q-o-q
% chg

OTC Link

Number of securities quoted

9,991

10,286

10,448

10,476

10,121

1.3

(3.4)

Number of active participants

94

94

94

95

97

3.2

2.1

Revenue per security quoted ($)

242

248

254

267

277

14.8

3.8

Revenue per average active participant ($)

25,267

27,085

28,202

29,619

29,240

15.7

(1.3)

Corporate Services

Number of corporate clients

OTCQX

355

366

358

365

395

11.3

8.2

OTCQB

923

938

951

922

953

3.3

3.4

Pink

727

755

756

761

736

1.2

(3.3)

Total

2,005

2,059

2,065

2,048

2,084

3.9

1.8

Revenue per client ($)

2,845

2,864

2,832

2,997

2,973

4.5

(0.8)

Graduates to a national securities exchange

12

24

21

20

16

33.3

(20.0)

Market Data Licensing

Market data professional users

20,512

20,390

20,557

20,951

20,991

2.3

0.2

Market data non-professional users

14,012

14,801

15,726

15,389

14,661

4.6

(4.7)

Revenue per terminal (total - $)

159

155

161

160

162

1.4

0.8

Source: OTCM, Edison Investment Research

OTCM has maintained its strategic emphasis on providing data-driven transparency in its premium markets. In addition to refining rules for its premium markets, it has taken steps to increase the availability of information for investors. These include its Transfer Agent Verified Shares Scheme, launched in 2016, that provides timely information on share issuance and share count, helping to alert shareholders to potential dilution of their interest. The number of agents participating has risen progressively and there are now 30 (22 at the time of the Q218 report), giving coverage of about 96% of companies on the OTCQX and OTCQB markets. OTCM also introduced stock promotion and shell flags recently and has added them to compliance data files that compliance departments can use to monitor risks. OTCM has now extended this by introducing a Small Cap Listed Compliance product, which provides a framework for monitoring data across both the listed and OTC small cap equity markets. The company reports that, at the beginning of October, 27 companies were subscribing to its compliance data or analytics products including many of the largest banks, custodian and clearing firms: an encouraging indicator that subscription to these services is becoming a default option for such companies.

The number of states that grant Blue Sky recognition to OTCQX and OTCQB has continued to tick up, with Missouri and Oklahoma added since the Q218 report, taking the total recognising OTCQX to 33 and OTCQB to 30 (see Exhibit 5 below). OTCQX coverage now includes states accounting for about 50% of the population in the US. Michigan is in the process of considering giving recognition and, were it to do so, this would increase the population coverage to 53%.

The North American Securities Administrators Association (NASAA) in July announced a model rule proposal for states to employ that would have the effect of granting OTCQX/OTCQB recognition. There was a period for comments that closed in August with only supportive submissions received. OTCM has noted that adoption of the model rule would be likely to facilitate a number of states moving towards Blue Sky recognition of its markets.

Exhibit 5: Blue Sky recognition for OTCQX and OTCQB

Alaska

Louisiana

Pennsylvania

Arkansas

Maine

Rhode Island

Colorado

Minnesota

South Dakota

Connecticut

Mississippi

Tennessee

Delaware

Missouri

Texas

Georgia

Nebraska

Utah

Hawaii

New Jersey

Vermont (OTCQX only)

Idaho (OTCQX only)

New Mexico

Washington

Indiana

Ohio

West Virginia

Iowa

Oklahoma

Wisconsin

Kansas (OTCQX only)

Oregon

Wyoming

Source: OTCM

Background and outlook

We start by considering the equity capital markets background as an indicator of the background for OTCM. While global economic forecasts have only seen small downward adjustments in recent months, commentators such as the OECD highlight increased uncertainty relating to trade tensions and normalisation of monetary policy, notably in the US. These factors are likely to have contributed to the recent correction in equity market prices, which is evident in the negative returns over three months for a range of indices, shown in Exhibit 6. Looking at the year-to-date figures, OTCQX and OTCQB indices have been significantly weaker than the broad US indices, which can be seen as reflecting a combination of the small- and mid-cap and Canadian components of its constituents: areas where weakness has been more marked. The strength of the US dollar in this period will also have been a factor influencing the US$ prices of international stocks in the OTCM indices.

Exhibit 6: Recent market index performance (total return %)

Period

S&P 500

Nasdaq Composite

OTCQX Composite

OTCQB

S&P TSX Venture

AIM All Share

US$

US$

US$

US$

C$

GB£

3m

(3.1)

(5.9)

(8.0)

(2.6)

(6.0)

(8.6)

6m

3.8

2.2

(11.3)

(3.1)

(14.5)

(6.4)

1y

7.9

9.5

3.8

(8.2)

(16.5)

(3.8)

Year to date

4.0

7.1

(12.8)

(18.9)

(22.3)

(4.5)

Source: Bloomberg. Note: priced on 6 November 2018.

We monitor the number of IPOs on Nasdaq, the Canadian TSX and TSX Venture exchanges as an indicator of corporate and market confidence and activity. For Nasdaq, the number of IPOs to end-September was 66% ahead of the same period last year, while on the Canadian exchanges TSX IPOs were just ahead and TSX Venture was running at more than double the number in the prior-year period. While these appear to be positive indicators, the increase in equity market volatility in October may mean corporate activity levels are more subdued in the near term and, arguably, this could also influence the timing of OTCM’s sales pipeline.

Exhibit 7: Nasdaq – number of IPOs

Exhibit 8: TSX and TSX Venture – number of IPOs

Source: Nasdaq

Source: TMX

Exhibit 7: Nasdaq – number of IPOs

Source: Nasdaq

Exhibit 8: TSX and TSX Venture – number of IPOs

Source: TMX

OTCM has highlighted success in winning international clients for its premium markets in the latest quarter. Its OTCQX and OTCQB markets can offer a complementary service facilitating cost-effective access to a US investor base and enhanced liquidity for international companies with primary listings elsewhere. The current geographical make-up of OTCQX and OTCQB indices is shown in Exhibits 11 and 12.

Exhibit 11: OTCQX Composite Index constituents

Exhibit 12: OTCQB Venture Index constituents

Source: OTCM. Note: % of 330 constituents 7/11/18 (395 companies on OTCQX end September 2018).

Source: OTCM. Note: % of 702 constituents 7/11/18 (953 companies on OTCQB end September 2018).

Exhibit 11: OTCQX Composite Index constituents

Source: OTCM. Note: % of 330 constituents 7/11/18 (395 companies on OTCQX end September 2018).

Exhibit 12: OTCQB Venture Index constituents

Source: OTCM. Note: % of 702 constituents 7/11/18 (953 companies on OTCQB end September 2018).

This shows the significant share of Canadian companies in both indices (helped in part by OTCM’s partnership with the Canadian Securities Exchange) and that international securities as a whole already account for 65% of the OTCQX index. For both markets there would seem to be significant potential to broaden the geographical breadth of the client base over time and the group is continuing to commit resources to international marketing and has announced that it will open a small office in London to provide a base for sales across Europe. OTCM is also very active in addressing markets in Asia and Australia.

On a medium- and longer-term view, OTCM sees potential benefits from the development of online or crowdfunded capital raising facilitated by Regulation A+ and Regulation Crowdfunding. The development of online funding could create a larger pool of companies that may be attracted to OTCM’s cost-effective market offering for secondary trading. In May, the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155) is set to extend the availability of Regulation A+ to SEC reporting companies; this section of the act largely reflected OTCM’s SEC petition for rulemaking. SEC rule changes that will influence the impact of the act are still awaited.

Next, we look at the trends in subscribers to market data; Exhibits 9 and 10 show figures for professional and non-professional users for OTCM and Nasdaq. Encouragingly, the number of professional users (the larger source of revenue for the Market Data Licensing division) has increased from the first quarter of this year, although it should be remembered that user numbers have tended to fluctuate on a quarterly basis, partly driven by audits of distributor subscriber numbers. The non-professional user numbers have risen y-o-y and significantly since 2012, albeit with variations, as shown in Exhibit 10. The small size of OTCM’s user base relative to Nasdaq underlines the opportunity to expand this source of revenue as the company continues to build its corporate client base and strengthens the reputation of its premium markets.

Exhibit 9: OTCM and UTP (Nasdaq) professional users

Exhibit 10: OTCM and UTP non-professional users

Source: OTCM, UTP Plan, Edison Investment Research

Source: OTCM, UTP Plan, Edison Investment Research

Exhibit 9: OTCM and UTP (Nasdaq) professional users

Source: OTCM, UTP Plan, Edison Investment Research

Exhibit 10: OTCM and UTP non-professional users

Source: OTCM, UTP Plan, Edison Investment Research

Other points we would highlight when considering the outlook for OTCM are as follows:

Adoption of the NASAA model rule should facilitate further additions to states granting OTCM markets Blue Sky recognition. While not directly influencing revenues, increasing recognition moves OTCM towards 100% coverage, increasing the utility of OTCM’s offering to corporates and enhancing the reputation of the OTCQX and OTCQB markets.

OTCM has highlighted that the market OTC Link ECN is addressing is limited in size and that it may need to adopt more aggressive pricing in order to gain share. While the ECN appears to be gaining share with its current pricing regime and the features it offers (including fully anonymous orders and integration with OTC Link ATS), there is potential for revenue and profitability to be affected if OTC Link ECN or competitor Global OTC decide to adjust pricing. Global OTC’s market share has recently fluctuated around a level of 10%, although in the first part of November has been close to 13%.

OTCM’s expenses are set to increase in FY19 as it moves into a new main office in New York. In our forecast (see next section), we assume that this will add approximately $0.5m to occupancy costs. The company expects to move in by mid-2019. The sublease expires in 2031 and provides 33,000 square feet of space.

Financials

Exhibit 13 summarises the changes in key numbers within our FY18 and FY19 estimates following the Q318 result. There is a modest revenue increase, mainly reflecting the better than expected result from OTC Link. We have assumed the 18% Q3 tax rate increases to 20% in subsequent quarters, so the EPS estimate increase is more muted in FY19 than for FY18.

Exhibit 13: Estimate revisions

 

Gross revenue ($m)

PBT ($m)

EPS ($)

Dividend ($)

 

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

2018e

58.2

58.6

0.7

19.5

20.0

2.6

1.31

1.36

3.8

1.20

1.24

3.3

2019e

60.7

61.3

0.9

20.6

20.9

1.7

1.36

1.38

1.5

1.25

1.27

1.6

Source: Edison Investment Research. Note: dividends include the declared and estimated special dividends of 65c and 67c for FY18 and FY19, respectively.

Cash available for operations at end-September stood at $26.1m compared with $25m at end-June and $23.7m at end-2017. This excluded restricted cash (held as clearing collateral) and including this total cash stood at $27.8m. For the year-end, we estimate cash and restricted cash of $22.7m following payment of the special dividend and an increase in capital spending related to the prospective office move. As mentioned in our last note in August, part of this cash together with borrowing could provide the means for a significant acquisition should a suitable opportunity arise in an area serving OTCM’s client base in small- and mid-cap corporates.

Valuation

We have updated our comparative P/E table (Exhibit 14), which includes major information providers MSCI and Markit (in recognition of OTCM’s subscription-based fees and market data exposure), together with global exchange averages and values for the S&P 500 index. OTCM trades within the range for the information providers and is trading above the FY18e and FY19e average P/Es for the exchanges (although well within the range of multiples for these companies). Given OTCM’s potential to increase its penetration with both domestic and international corporates and to leverage its liquid balance sheet, there should be good scope for positive surprises in earnings over the medium to longer term, helping to justify the current rating.

Exhibit 14: OTCM comparative multiples

Estimated P/E ratios (x)

FY18e

FY19e

MSCI

28.4

25.1

Markit

22.5

20.1

Average information providers

25.5

22.6

Average global exchanges

24.8

21.6

S&P 500

16.7

15.3

OTCM

23.8

23.4

Source: Bloomberg, Edison Investment Research. Note: prices as at 13 November 2018.

Using our discounted cash flow model to determine a set of assumptions that would match the current share price, we find that a discount rate of 10%, long-term cash flow growth of 4% and a terminal cash flow multiple of 17.1x (arguably not excessive in comparison to the current year value of c 26x) would give a valuation in line with the share price at the time of writing ($32.40, 13 November 2018). A sensitivity table shows the variation in implied valuation with changes in growth and discount rate assumptions.

Exhibit 15: Discounted cash flow valuation sensitivity ($ per share)

Discount rate (right)
2020–28e growth

8%

9%

10%

11%

12%

3%

35.1

32.8

30.8

28.9

27.2

4%

37.0

34.6

32.4

30.4

28.5

5%

39.0

36.4

34.1

31.9

30.0

6%

41.2

38.4

35.9

33.6

31.5

Source: Edison Investment Research

Taking into account the comparative valuations shown above and the potential DCF outputs on a range of assumptions, we see a fair value of c $34 as reasonable (previously c $31).

Exhibit 12: Financial summary

$000s

2015

2016

2017

2018e

2019e

Year end 31 December

PROFIT & LOSS

OTC Link

11,796

10,573

10,074

10,957

11,050

Market Data Licensing

20,610

21,054

21,922

23,235

24,388

Corporate Services

17,503

19,254

22,660

24,406

25,838

Revenue

 

 

49,909

50,881

54,656

58,598

61,275

Re-distribution fees and rebates

(2,379)

(2,317)

(2,480)

(2,796)

(3,094)

Net revenue

47,530

48,564

52,176

55,802

58,181

Operating expenses

(28,972)

(30,032)

(32,511)

(34,911)

(36,338)

EBITDA

 

 

18,558

18,532

19,665

20,891

21,844

Depreciation

(1,692)

(1,606)

(1,361)

(1,042)

(1,065)

Operating profit (before amort. and except).

16,866

16,926

18,304

19,849

20,779

Net interest

27

9

47

109

133

Profit Before Tax (norm)

 

 

16,893

16,935

18,351

19,958

20,911

Tax

(6,635)

(6,407)

(5,792)

(3,806)

(4,182)

Profit after tax

10,258

10,528

12,559

16,152

16,729

Profit after tax and allocation to RSAs

9,971

10,252

12,241

15,746

16,297

Average Number of Shares Outstanding (m)

11.3

11.3

11.6

11.6

11.8

EPS - basic (c)

 

 

90.6

92.4

109.9

139.1

141.2

Fully diluted EPS (c)

 

 

88.3

90.4

105.8

136.1

138.2

Dividend per share (c)

108.0

116.0

116.0

124.0

127.0

EBITDA Margin (%)

39

38

38

37

38

Operating profit margin (%)

35

35

35

36

36

BALANCE SHEET

Non-current assets

 

 

 

 

 

 

 

Intangible assets

291

291

362

324

324

Property and other

4,187

3,267

3,506

4,249

4,089

Current assets

 

 

 

 

 

 

 

Debtors

6,082

6,262

6,450

6,233

6,233

Cash & cash investments

23,925

25,034

23,683

21,136

26,254

Other current assets

1,729

1,789

2,316

2,502

2,602

Current liabilities

 

 

 

 

 

 

 

Deferred revenues

(12,737)

(14,664)

(15,531)

(11,413)

(12,000)

Other current liabilities

(5,063)

(5,372)

(5,644)

(5,140)

(5,140)

Long-term liabilities

 

 

 

 

 

 

 

Tax, rent and other

(867)

(1,101)

(1,351)

(1,463)

(1,463)

Net assets

 

 

17,547

15,506

13,791

16,428

20,899

NAV per share ($)

 

 

1.55

1.36

1.21

1.42

1.81

CASH FLOW

Operating cash flow

 

 

22,400

21,752

21,629

17,696

24,831

Net Interest

27

9

47

109

133

Tax

(5,320)

(6,021)

(5,193)

(2,683)

(4,182)

Capex / intangible investment

(940)

(415)

(1,165)

(935)

(905)

Financing / investments

(420)

(1,157)

(3,407)

(2,544)

(100)

Dividends

(12,094)

(13,059)

(13,262)

(14,190)

(14,658)

Net cash flow

3,653

1,109

(1,351)

(2,547)

5,118

Opening net (debt)/cash

 

 

20,272

23,925

25,034

23,683

21,136

Closing net (debt)/cash

 

 

23,925

25,034

23,683

21,136

26,254

Cash and restricted cash

24,135

25,244

24,375

22,694

27,812

Source: OTC Markets Group accounts, Edison Investment Research

Contact details

Revenue by geography

304 Hudson Street
3rd Floor
New York NY 10013
US
+1 (212) 896 4400
www.otcmarkets.com

Contact details

304 Hudson Street
3rd Floor
New York NY 10013
US
+1 (212) 896 4400
www.otcmarkets.com

Revenue by geography

Management team

CEO, president, director: R Cromwell Coulson

CFO: Beatrice (Bea) Ordonez

In 1997, Cromwell led a group of investors in acquiring OTCM’s predecessor business, the National Quotation Bureau (NQB). Prior to this, Cromwell was an institutional trader and portfolio manager in distressed and value-oriented investments.

Bea joined OTCM as CFO in 2015. She has more than 20 years of experience in the financial services industry including 13 years as COO and MD at Convergex, a global brokerage and trading-related services provider. She is a qualified chartered accountant (ICAEW) and worked at Arthur Andersen and PwC.

General counsel: Dan Zinn

Chairman: Neal Wolkoff

Dan Zinn joined in November 2010. Prior to joining OTCM, he was a partner at The Nelson Law Firm, LLC, and was outside counsel to the company. Dan previously worked in the corporate office of the American International Group (AIG).

Neal Wolkoff is a former executive of three exchanges (including being former chairman and CEO of AMEX and an executive officer at NYMEX). He is a consultant and attorney focusing on futures and securities markets, exchanges, market regulation, operations and clearing houses.

Management team

CEO, president, director: R Cromwell Coulson

In 1997, Cromwell led a group of investors in acquiring OTCM’s predecessor business, the National Quotation Bureau (NQB). Prior to this, Cromwell was an institutional trader and portfolio manager in distressed and value-oriented investments.

CFO: Beatrice (Bea) Ordonez

Bea joined OTCM as CFO in 2015. She has more than 20 years of experience in the financial services industry including 13 years as COO and MD at Convergex, a global brokerage and trading-related services provider. She is a qualified chartered accountant (ICAEW) and worked at Arthur Andersen and PwC.

General counsel: Dan Zinn

Dan Zinn joined in November 2010. Prior to joining OTCM, he was a partner at The Nelson Law Firm, LLC, and was outside counsel to the company. Dan previously worked in the corporate office of the American International Group (AIG).

Chairman: Neal Wolkoff

Neal Wolkoff is a former executive of three exchanges (including being former chairman and CEO of AMEX and an executive officer at NYMEX). He is a consultant and attorney focusing on futures and securities markets, exchanges, market regulation, operations and clearing houses.

Principal shareholders

(%)

Officers and directors

38.1

Including R Cromwell Coulson

30.4

T Rowe Price

3.5

Horizon Kinetics

1.0

Companies named in this report

MSCI, Markit, Nasdaq

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by OTC Markets Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by OTC Markets Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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