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OTC Markets Group — Update 13 May 2016

OTC Markets Group (US: OTCM)

Last close As at 05/08/2026

—

— 0.00 (0.00%)

Market capitalisation

—

More on this equity

Research: Financials

OTC Markets Group — Update 13 May 2016

OTC Markets Group

Analyst avatar placeholder

Written by

Financials

OTC Markets Group

High yield with net cash and growth prospects

Q116 results

Financial services

13 May 2016

Price

US$16.8

Market cap

US$188m

Net cash ($m) at 31 March 2016

22.6

Shares in issue

11.2m

Free float

60%

Code

OTCM

Primary exchange

OTC QX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.6)

12.0

8.4

Rel (local)

(2.7)

1.2

10.2

52-week high/low

US$17.2

US$13.2

Business description

OTC Markets Group operates the OTCQX, OTCQB and Pink financial markets for 10,000 US and global securities. Its trading system, OTC Link ATS, is operated by OTC Link LLC, a member of FINRA/SIPC and a SEC-regulated ATS.

Next events

Q216 results

August 2016

Analyst

Peter Thorne

+44 (0)20 3077 5765

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

OTC Markets Group (OTCM) continued to record a high level of revenue in Q116 with gross revenues rising 11% y-o-y and net income 25%. Seasonal factors resulted in a q-o-q decline of 2% in revenue and 21% in net income. The quarterly dividend was maintained at $0.14 per share, the same as in Q415 and its prospective yield of c 7% remains attractive for a profitable company with cash of $22.6m, no debt and exposure to the growth of online capital raising. The shares are trading below our DCF valuation of $19.2 per share (previously $23.7) and at a discount to other market data providers on both FY16e and FY17e P/Es.

Year end

Gross
revenue ($m)

PBT
($m)

EPS*
($)

DPS**
($)

P/E
(x)

Yield
(%)

12/14

42.2

12.9

0.69

0.82

24.4

4.9

12/15

49.9

16.9

0.88

1.08

19.1

6.4

12/16e

52.3

17.1

0.89

1.16

18.9

6.9

12/17e

54.4

17.8

0.91

1.20

18.5

7.1

Note: *Fully diluted and calculated after restricted stock awards and excluding exceptional items and amortisation of acquired intangibles. **Including special declared dividends of $0.5 for 2014, $0.6 for 2015 and an estimated $0.6 for 2016 and 2017.

Net profit growth y-o-y, but fall q-o-q

Net income in Q116 was 25% higher than Q115, largely as a result of an 11% increase in gross revenues brought about by the successful introduction of its OTCQB market as a premier market designation for venture companies, which boosted Corporate Services revenues. Q116 net income fell by 21% compared with Q415, largely as a result of seasonal factors. These include additional Q1 compensation expense arising from bonuses and non-renewals of some Corporate Services contracts in Q116.

Crowdfunding opportunity

In February 2016 Elio Motors, the first online capital raising under Regulation A+, began trading on OTCQX Best Market. OTCM believes it is well positioned to be the trading venue of choice for the next generation of ‘crowdfunded’ companies. This is discussed in more detail in our outlook note published on 19 April 2016.

Valuation: High yield and discount to DCF valuation

Including a special dividend, we estimate that OTCM yields c 7% for 2016, which is attractive, especially considering the company has net cash of $22.6m, no debt and is profitable. It is trading below our $19.2 per share DCF valuation and at a 23% discount to the FY16e P/Es of two data providers, MSCI and Markit. Given that 80% of OTCM’s revenues are subscription based, we believe that these two companies are a fair source of comparison. Our previous valuation was $23.7 per share and the decrease is mainly due to a modest downward revision to our cash flow forecasts for FY16 following the Q116 results. The designation of its OTCQB market for venture companies and the possibility that it will attract companies created online on crowdfunding portals adds potential growth to its attractions.

Q116 results

OTCM’s results for Q116 are shown in Exhibit 1 below.

Exhibit 1: Q116 results

Q115

Q415

Q116

% change

y-o-y

q-o-q

OTC Link ATS

3,044

2,882

2,754

(10)

(4)

Market data licensing

5,233

5,121

5,325

2

4

Corporate Services

3,247

5,052

4,672

44

(8)

Gross revenues

11,524

13,055

12,751

11

(2)

Redistribution fees and rebates

(600)

(577)

(593)

(1)

3

Net revenue

10,924

12,478

12,158

11

(3)

Operating expenses

(7,769)

(7,447)

(8,361)

8

12

Income from operations

3,155

5,031

3,797

20

(25)

Other income/net interest

16

(2)

(8)

0

0

Income before provision for income taxes

3,171

5,029

3,789

19

(25)

Taxes

(1,315)

(2,104)

(1,474)

12

(30)

Net income

1,856

2,925

2,315

25

(21)

Operating margin (%)

29

40

31

Tax rate (%)

41

42

39

Source: OTCM, Edison Investment Research

OTC Link ATS revenues declined 10% y-o-y and 4% q-o-q. This revenue stream is under pressure from a decrease in OTC dealer subscription revenue caused by consolidation and contraction in the securities industry. The retirement of the OTCQuote.com product and pricing changes introduced in July 2015, which eliminated quote fees for OTCQX and OTCQB securities, also negatively affected revenue. The impact of these changes was only partly offset by increased revenue from higher messaging fees.

Market data licensing revenues increased 2% y-o-y and 4% q-o-q. The increase arose from the introduction of new indirect access fees for subscribers using a third-party portal, partly offset by a decline in non-professional user licence subscriptions and declines in advertising revenue.

Corporate Services revenue rose 44% y-o-y, but fell 8% q-o-q. The large yearly increase reflects OTCM’s success in designating its OTCQB market as a premier market for venture-stage companies. OTCQB companies amounted to 929 at end March 2016, from 661 at end March 2015 and 942 at the end of 2015. OTCQX companies amounted to 388 at the end of March 2016, from 383 at end March 2015, and 424 at end of 2015.OTCQX companies renew their subscriptions annually after year end and in Q116 approximately 10% did not renew, which contributed to an 8% fall q-o-q in Corporate Services revenues. The non-renewal rate of 10% compares to 11% for 2015.

In aggregate, net revenue rose 11% y-o-y and fell 3% q-o-q.

Operating expenses increased 8% y-o-y and 12% q-o-q in Q116. Around 65% of expenses consist of compensation and benefits, with IT infrastructure and information services accounting for around 15%. In Q116, compensation and benefits increased 21% q-o-q and 6% y-o-y due to higher headcount, an increase in base salaries and higher bonuses. The latter are paid in Q116, so account for the large q-o-q increase. IT and infrastructure increased 16% in Q116 on Q115, and 2% q-o-q.

These changes in revenues and expenditure resulted in a 25% y-o-y increase in net income in Q116 and a 21% fall q-o-q. The sequential decline was largely the result of a seasonal decline in revenue from the impact of timing of Corporate Services renewals and higher expenses from Q116 bonuses. It does not reflect a new trend for the business.


Valuation

We estimate that around 80% of OTCM’s revenues are subscription based, so we believe that data providers such as MSCI and Markit provide a useful benchmark to its valuation. We estimate that OTCM is trading at a 23% discount to the data providers’ average 2016e P/E and a 15% discount to their 2017e average ratio. OTCM is trading at 8% and 20% premiums to the S&P 500 for 2016e and 2017e P/Es respectively.

Exhibit 2: OTCM comparative multiples

Estimated P/E ratios (x)

2016

2017

MSCI

26.4

22.3

Markit

22.8

21.2

Average

24.6

21.8

S&P 500

17.6

15.4

OTCM

19.0

18.5

Source: Bloomberg, Edison Investment Research. Note: Prices at close of business on 9 May 2016.

We also value OTCM using DCF techniques. At 31 March 2016 it had $22.6m of cash and with free cash flow in 2016e of c $11.2m, we estimate that OTCM would be worth $19.2 per share assuming a long-term growth rate of 3% and cost of capital of 9%. This is lower than our previous valuation of $23.7m, largely because of our lower cash flow forecasts for 2016.

Financials

We have revised our OTCM forecasts for 2016 and 2017 as follows. Our gross revenue forecasts are largely unchanged but PBT is lower due to higher expense expectations following the Q116 results. Our full forecasts are shown in Exhibit 4.

Exhibit 3: Earnings revisions

 

Gross revenue ($m)

PBT ($m)

EPS ($)

Dividend ($)

 

Old

New

Change
(%)

Old

New

Change
(%)

Old

New

Change
(%)

Old

New

Change
(%)

2016e

52.3

52.3

0

18.4

17.1

(7)

0.94

0.89

(5)

1.16

1.16

0

2017e

54.5

54.4

0

19.6

17.8

(9)

0.99

0.91

(8)

1.20

1.20

0

Source: Edison Investment Research

Exhibit 4: Financial summary

$000s

2011

2012

2013

2014

2015

2016e

2017e

Year end 31 December

PROFIT & LOSS

 

 

 

 

 

 

 

OTC Link ATS

11,773

11,640

11,437

12,019

11,796

11,454

11,500

Market Data Licensing

13,680

14,081

14,741

20,334

20,610

20,925

21,000

Corporate services

7,498

9,305

9,331

9,862

17,503

19,872

21,859

Gross Revenue

32,951

35,026

35,509

42,215

49,909

52,251

54,359

Re-distribution fees and rebates

(2,188)

(1,842)

(1,869)

(2,388)

(2,379)

(2,372)

(2,450)

Net revenue

30,763

33,184

33,640

39,827

47,530

49,879

51,909

Operating expenses

(22,299)

(22,606)

(23,700)

(25,382)

(28,972)

(31,144)

(32,390)

EBITDA

8,464

10,578

9,940

14,445

18,558

18,735

19,519

Depreciation

(1,358)

(1,622)

(1,642)

(1,543)

(1,692)

(1,668)

(1,750)

Operating Profit

7,106

8,956

8,298

12,902

16,866

17,067

17,769

Net Interest

(115)

30

0

9

27

(8)

0

Profit Before Tax (FRS 3)

6,991

8,986

8,298

12,911

16,893

17,059

17,769

Tax

(2,139)

(3,509)

(2,667)

(5,021)

(6,635)

(6,649)

(6,930)

Profit After Tax (FRS 3)

4,852

5,477

5,631

7,890

10,258

10,410

10,839

Profit After Tax (norm)

4,791

5,361

5,466

7,638

9,971

10,410

10,839

 

 

 

 

 

 

 

 

Fully diluted av. No. of shares (m)

10.5

10.6

10.8

11.1

11.3

11.7

11.9

Fully diluted EPS - normalised ($)

0.45

0.51

0.51

0.69

0.88

0.89

0.91

Fully diluted EPS - FRS 3 ($)

0.46

0.51

0.51

0.71

0.91

0.93

0.95

Dividend per share ($)

0.16

0.20

0.24

0.82

1.08

1.16

1.20

 

 

 

 

 

 

 

 

EBITDA Margin (%)

28

32

30

36

39

38

38

Operating profit margin (%)

23

27

25

32

35

34

34

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Fixed Assets

 

 

 

 

 

 

 

Intangible Assets

291

291

291

291

291

291

291

Tangible Assets

5,143

5,066

4,184

4,357

3,507

1,989

1,239

Investments

209

209

210

210

210

210

210

Current Assets

 

 

 

 

 

 

 

Debtors

7,194

6,481

4,980

5,674

6,082

6,299

6,500

Cash & cash investments

10,170

13,611

18,936

20,272

23,925

21,703

21,375

Current Liabilities

 

 

 

 

 

 

 

Creditors

(3,695)

(3,589)

(3,909)

(4,450)

(4,971)

(2,353)

(2,512)

Long Term Liabilities

 

 

 

 

 

 

 

Deferred rent

(926)

(786)

(608)

(391)

(139)

(240)

(240)

Other long term liabilities

(1,598)

(1,176)

(974)

(954)

(867)

(991)

(991)

Net Assets

12,872

14,515

18,704

18,251

17,547

16,198

15,173

NAV per share ($)

1.21

1.34

1.68

1.62

1.55

1.44

1.34

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

11,086

12,175

10,662

16,985

22,400

16,867

21,116

Net Interest

(115)

30

0

9

27

(8)

0

Tax

(1,871)

(3,498)

(2,334)

(4,492)

(5,320)

(5,501)

(6,930)

Capex

(2,426)

(1,346)

(471)

(1,582)

(940)

(150)

(1,000)

Financing / investments

(1,536)

1,301

79

(475)

(420)

(365)

0

Dividends

(1,671)

(5,221)

(2,611)

(9,109)

(12,094)

(13,064)

(13,515)

Net Cash Flow

3,467

3,441

5,325

1,336

3,653

(2,222)

(328)

Opening net (debt)/cash

6,703

10,170

13,611

18,936

20,272

23,925

21,703

Closing net (debt)/cash

10,170

13,611

18,936

20,272

23,925

21,703

21,375

Source: OTCM, Edison Investment Research

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