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OTC Markets Group — Update 19 November 2015

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 19 November 2015

OTC Markets Group

Analyst avatar placeholder

Written by

Financials

OTC Markets Group

Growth and a special dividend

Q315 results

Financial services

20 November 2015

Price

US$15.1

Market cap

US$169m

Net cash ($m) at 30 Sept 2015

24.4

Shares in issue (excluding treasury)

11.2m

Free float

60%

Code

OTCM

Primary exchange

OTCQX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.5

4.1

5.2

Rel (local)

5.0

4.1

3.6

52-week high/low

US$16.7

US$13.2

Business description

OTC Markets Group (OTCM) operates the OTCQX Best Market, OTCQB Venture Market and OTC Pink financial market 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 SEC regulated ATS. Its markets offer a cost-effective solution for targeting US investors.

Next event

FY15 results

March 2016 (estimated)

Analyst

Peter Thorne

+44 (0)20 3077 5765

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

OTC Markets Group (OTCQX: OTCM) continues to benefit from its initiative to create a US venture market to rival AIM in the UK and TSX Venture in Canada. Revenues continued to rise in Q315 and operational gearing led to a higher operating margin. OTCM has net cash on its balance sheet and is generating considerable cash from its business. It has announced a special dividend for 2015, having also paid one in 2014. OTCM is trading on a yield of 7.4% for 2015 and 3.7% excluding the special dividend. It is also trading below our DCF valuation.

Year end

Gross revenue
($m)

PBT*
($m)

EPS*
(c)

DPS**
(c)

P/E
(x)

Yield
(%)

12/13

35.5

8.3

50.8

24.0

29.7

1.6

12/14

42.2

12.9

69.4

82.0

21.8

5.4

12/15e

50.2

16.8

88.8

112.0

17.0

7.4

12/16e

52.0

16.6

88.3

56.0

17.1

3.7

Note: *PBT and EPS are normalised and exclude exceptional items and amortisation of intangibles. **Includes special dividend of $0.5 for 2014 and $0.6 for 2015.

Q315 results show continued growth

Revenues grew 19% in Q315 y-o-y and 4% q-o-q, largely thanks to OTCM’s initiative in May 2014 to transform its OTCQB market into one for venture companies, which has boosted its corporate services income. OTCQB already has as many companies as the much longer established AIM market in the UK and given the size of the US economy there remains considerable scope for this market to expand further. Incremental costs from new companies joining OTCQB are small and less than the revenue so OTCM’s operating margin is rising; in Q315 it reached 37%, the highest level since 2007.

Another large special dividend

With the publication of its Q3 results, OTCM announced a $0.6 per share special dividend, payable in December 2015. This is in addition to its ordinary quarterly dividend of $0.14 per share. OTCM already has net cash of $24.4m and follows a progressive dividend policy in line with its profit growth. It announced an increase in its ordinary quarterly dividends to $0.14 from $0.1 in August 2015 with the publication of its Q215 results. In November 2014, when it published its Q314 results, OTCM announced a special dividend of $0.5 per share.

Valuation: High yield

OTCM shares are trading below our updated DCF valuation of $21.3 per share (previously $19.1) based on long-term growth of 3% and a cost of equity of 9%. Its 2015 P/E ratio is 3% lower than that of the S&P500 index and 34% lower than the average of the two data providers, MSCI and Markit. A large portion, c 80% in 2014 according to our estimates, of OTCM’s revenue is subscription based and not dependent on trading activity, so we believe that the two data providers are a useful benchmark with which to compare OTCM.

Q315 results

Q315 gross revenue rose 4% q-o-q and 19% y-o-y, with all of the growth coming from corporate service revenues. Operating expenses were flat q-o-q but up 14% y-o-y, similar to the increase in Q2 reflecting higher client volumes and increased regulatory and client expectations. Q3 operating margin rose to 37%, the highest level since 2007, as a result of positive operational gearing, as the increase in revenue from corporate services did not incur incremental costs. Q315 income before tax grew 33% y-o-y and 12% q-o-q. OTCM’s Q315 tax rate was particularly low, at 33% compared with 42% in Q215, as a result of one-off tax benefits arising from changes in estimates related to state and local apportionment rates. Net income increased by 59% to $3.1m.

Exhibit 1: OTCM quarterly results

$000s

Q314

Q215

Q315

% change

y-o-y

q-o-q

OTC Link ATS

3,146

2,931

2,939

(7)

0

Market data licensing

5,123

5,169

5,087

(1)

(2)

Corporate services

2,530

4,330

4,874

93

13

Gross revenues

10,799

12,430

12,900

19

4

Re-distribution fees and rebates

(593)

(600)

(602)

2

0

Net revenue

10,206

11,830

12,298

20

4

Operating expenses (including depreciation and amortisation)

(6,759)

(7,741)

(7,707)

14

(0)

Income from operations

3,447

4,089

4,591

33

12

Other income/net interest

1

7

6

0

0

Income before provision for income taxes

3,448

4,096

4,597

33

12

Taxes

(1,511)

(1,704)

(1,512)

0

(11)

Net income

1,937

2,392

3,085

59

29

Operating margin (%)

34

35

37

Tax rate (%)

44

42

33

Source: OTCM, Edison Investment Research

OTC Link ATS revenues

OTC Link ATS enables broker-dealers to provide their clients with trade execution for companies quoted on OTCM’s various markets. It earns revenue by charging the broker-dealers various usage fees for stocks in which they make a market and messaging fees as well as subscription fees. OTC Link ATS revenues have been under pressure because of a decline in the number of broker-dealers, as the industry becomes more concentrated and firms with less competitive IT systems are forced to leave the industry. On 1 July 2015 OTCM introduced a new fee structure for OTC Link ATS. No charge is made for quoting securities traded on OTCQX and OTCQB and messaging fees were increased by 50% for priced securities and 20% for unpriced securities. OTCM anticipates that the pricing changes will encourage broker-dealers to quote on OTCQX and OTCQB and deepen the trading books of companies on these markets. In Q315, these changes reduced revenues for quotes by $216,000, but increased message revenue by $192,000. The operating systems of OTC Link ATS have also been enhanced to improve reliability and reduce latency, and OTCM believes it will benefit from these measures in the future, as they will encourage more activity.

Market data licensing

OTCM obtains revenue by providing subscribers with access to market data, company data and security information collected through OTC Link ATS and Corporate Services business lines. A repricing initiative in January 2014 resulted in a 38% y-o-y growth in revenue in 2014 and without the tailwind of this initiative it was expected that revenue growth in 2015 would slow down, which did occur.

Corporate Services

Within this division, services offered include the OTCQX Best and OTCQB venture markets, OTC Disclosure and News Services, Real-Time Level 2 Quote Display and Blue Sky Monitoring Service. Corporate services revenues have increased since Q314 after several periods of flat revenues following the introduction on 1 May 2014 of new standards for OTCQB and the designation of the market as one for venture companies. In Q315 revenues grew 93% y-o-y and 13% q-o-q. OTCQB subscribers at end Q315 increased to 959 from 955 at end Q215 and 118 at end Q314. Revenues from the OTCQB market were $2.3m in the quarter, up from $1.9m in Q2, while revenues from OTCQX were $1.6m compared with $1.5 in Q2. There has clearly been a slowdown in the pace of new companies joining OTCQB after the initial rush, but the company believes that its prospects are good given the entrepreneurial nature of the US economy. OTCQB is already as large as the much longer established AIM market in the UK.

Revenue trends

The following table shows the evolution of quarterly gross revenues at OTCM over the last 2 years. Revenue from OTC Link ATA has remained around $3m per quarter which is a solid performance given the declining number of market participants. Market data licensing achieved a step-up in revenues in Q114 as a result of a re-pricing initiative and has maintained a quarter run rate of around $5m ever since. Quarterly growth from corporate services started in Q214 following the implementation of new standards for OTCQB and its designation as a market for venture companies.

Exhibit 2: OTCM quarterly gross revenues

Q213

Q313

Q413

Q114

Q214

Q314

Q414

Q115

Q215

Q315

Revenue $000s

OTC Link ATS

2,955

2,815

2,817

2,902

2,772

3,146

3,199

3,044

2,931

2,939

Market Data Licensing

3,647

3,778

3,749

4,959

5,148

5,123

5,104

5,233

5,169

5,087

Corporate Services

2,332

2,367

2,424

2,109

2,319

2,530

2,904

3,247

4,330

4,874

Gross revenues

8,934

8,960

8,990

9,970

10,239

10,799

11,207

11,524

12,430

12,900

% Change

OTC Link ATS

(5)

0

3

(4)

13

2

(5)

(4)

0

Market Data Licensing

4

(1)

32

4

(0)

(0)

3

(1)

(2)

Corporate Services

2

2

(13)

10

9

15

12

33

13

Gross revenues

0

0

11

3

5

4

3

8

4

Source: OTCM, Edison Investment Research

Expenses

In Q115, OTCM increased its compensation and benefits to staff, to remain competitive in the industry and reward them for the success of the company. It also incurred additional IT expenditure to meet new regulatory standards and customer expectations. The expense base since Q1 has remained around $7.7m per quarter.

Valuation

The following table compares OTCM’s P/E ratio with the US market represented by the S&P500 index as well as against two data providers, MSCI and Market. With over 40% of OTCM’s revenue from market data licensing and a large amount, c 80% according to our estimates, of OTC Link ATS and corporate services revenue linked to subscriptions rather than trading activity, we believe that these two data providers are a useful benchmark for OTCM. OTCM’s 2015 P/E ratio is 3% lower than that of the S&P500 and 34% lower than the average of MSCI and Markit.

We have also considered OTCM’s valuation using DCF. Net cash at 30 September 2015 was $24m and with c $12m of free cash flow in 2015 OTCM would be worth $21.3 per share on a DCF basis if we assume a long-term growth rate of 3% and a cost of capital of 9% (compared with $19.1 in August 2015). The uplift arose because of an increase in our estimate of free cash flow to $12m from $11m for 2015.

Exhibit 3: OTCM comparative multiples

Estimated P/E ratios (x)

2015

2016

MSCI

30.8

25.7

Markit

20.4

19.2

Average

25.6

22.5

S&P 500 index

17.5

16.1

OTCM

17.0

17.1

Source: Bloomberg, Edison Investment Research. Note: Prices at close of business on 19 November 2015.

Financials

We have made minor changes to our forecasts following the announcement of the Q315 results, as we show in Exhibit 4 below. We anticipate slightly higher revenue in Corporate Services, which has led to a 5% increase in our PBT estimate for 2015, given the operational leverage in this activity. The 10% increase in expected EPS for 2015 is the result of the PBT increase and a slightly lower tax rate than previously expected (39% vs 42%) as a result of the one-off tax effects in Q315.

With the announcement of its Q3 results, OTCM announced an ordinary dividend of $0.14 per share, in line with the previous quarter. It also announced a special dividend of $0.6 per share. Both are payable in December 2015. The special dividend reflects the $24.4m of cash on its balance sheet at end September 2015 and the company’s policy of paying dividends in line with profit growth. In Q414, OTCM paid a special dividend of $0.5 per share and an ordinary dividend of $0.1 per share, so the special dividend payable in Q415 has been increased by 20% and the ordinary dividend by 40%.

Exhibit 4: OTCM earnings revisions

 

Net revenue ($m)

PBT ($m)

EPS (c)

Dividend (c)

 

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

2015e

47.2

47.8

1

16.0

16.8

5

81.0

88.8

10

52.0

112.0

115

2016e

49.3

49.3

0

16.6

16.6

0

88.0

88.3

0

56.0

56.0

0

Source: Edison Investment Research, OTC Markets


Exhibit 5: Financial summary

$000s

2011

2012

2013

2014

2015e

2016e

Year-end 31 December

PROFIT & LOSS

 

 

 

 

 

 

 

 

OTC Link ATS

 

 

11,773

11,640

11,437

12,019

12,114

12,500

Market Data Licensing

 

 

13,680

14,081

14,741

20,334

20,639

21,000

Corporate services

 

 

7,498

9,305

9,331

9,862

17,451

18,500

Gross Revenue

 

 

32,951

35,026

35,509

42,215

50,204

52,000

Re-distribution fees and rebates

 

 

(2,188)

(1,842)

(1,869)

(2,388)

(2,402)

(2,700)

Revenue

 

 

30,763

33,184

33,640

39,827

47,802

49,300

Cost of Sales

 

 

(22,299)

(22,606)

(23,700)

(25,382)

(29,357)

(31,000)

Gross Profit

 

 

8,464

10,578

9,940

14,445

18,445

18,300

Operating Profit (before GW and except.)

 

 

8,464

10,578

9,940

14,445

18,445

18,300

Intangible Amortisation & depreciation

 

 

(1,358)

(1,622)

(1,642)

(1,543)

(1,680)

(1,750)

Operating Profit

 

 

7,106

8,956

8,298

12,902

16,765

16,550

Net Interest

 

 

(115)

30

0

9

29

0

Profit Before Tax (norm)

 

 

6,991

8,986

8,298

12,911

16,794

16,550

Tax

 

 

(2,139)

(3,509)

(2,667)

(5,021)

(6,602)

(6,455)

Profit After Tax (norm)

 

 

4,791

5,361

5,466

7,725

10,027

9,931

Profit After Tax (FRS 3)

 

 

4,852

5,477

5,631

7,890

10,192

10,096

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

10.5

10.5

10.7

10.8

11.0

11.0

EPS - normalised (c)

 

 

45.5

50.5

50.8

69.4

88.8

88.3

EPS - FRS 3 (c)

 

 

45.7

50.9

51.2

71.3

91.2

90.3

Dividend per share (c)

 

 

16.0

20.0

24.0

82.0

112.0

56.0

 

 

 

 

 

 

 

 

 

Gross Margin (%)

28

32

30

36

39

37

EBITDA Margin (%)

28

32

30

36

39

37

Operating Margin (before GW and except.) (%)

28

32

30

36

39

37

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

Fixed Assets

 

 

 

 

 

 

 

 

Intangible Assets

 

 

291

291

291

291

291

291

Tangible Assets

 

 

5,143

5,066

4,184

4,357

3,853

3,753

Investments

 

 

209

209

210

210

210

210

Current Assets

 

 

 

 

 

 

 

 

Debtors

 

 

7,194

6,481

4,980

5,674

5,869

5,900

Cash & cash investments

 

 

10,170

13,611

18,936

20,272

20,390

24,624

Current Liabilities

 

 

 

 

 

 

 

 

Creditors

 

 

(3,695)

(3,589)

(3,909)

(4,450)

(4,794)

(4,485)

Long Term Liabilities

 

 

 

 

 

 

 

 

Deferred rent

 

 

(926)

(786)

(608)

(391)

(391)

(391)

Other long term liabilities

 

 

(1,598)

(1,176)

(974)

(954)

(1,086)

(1,082)

Net Assets

 

 

12,872

14,515

18,704

18,251

17,528

21,915

NAV per share ($)

 

 

1.21

1.34

1.68

1.60

1.52

1.88

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow (pre-tax)

 

 

11,086

12,175

10,662

16,985

19,605

18,776

Net Interest

 

 

(115)

30

0

9

29

0

Tax

 

 

(1,871)

(3,498)

(2,334)

(4,492)

(5,881)

(6,431)

Capex

 

 

(2,426)

(1,346)

(471)

(1,582)

(1,261)

(1,650)

Financing / investments

 

 

(1,536)

1,301

79

(475)

(254)

0

Dividends

 

 

(1,671)

(5,221)

(2,611)

(9,109)

(12,119)

(6,463)

Net Cash Flow

 

 

3,467

3,441

5,325

1,336

119

4,233

Opening net (debt)/cash

 

 

6,703

10,170

13,611

18,936

20,272

20,391

Closing net (debt)/cash

 

 

10,170

13,611

18,936

20,272

20,391

24,624

Source: OTCM, Edison Investment Research

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