OTC Markets Group’s (OTCM) first quarter results showed progress with revenues up 5% and pre-tax profits 12% ahead of Q116. While the corporate client count was down, there are encouraging signs of an improvement in the rate of new additions. OTCM continues to refine the rules for its premium markets to enhance their reputation while minimising the burden on corporates. The drive to increase the number of states that grant OTCM markets Blue Sky recognition continues as a further means to increase their appeal to corporates. OTCM is also taking a measured approach in its response to the competitive threat from the Global OTC ATS.
Within the 5% Q117 revenue increase corporate services was the main contributor to growth, driven principally by a price increase implemented at OTCQX. Revenue for OTC Link ATS (trading services) was down reflecting continued contraction in the number of broker-dealer subscribers, while market data revenues showed a modest increase helped by a large increase in non-professional users. The total number of client companies was down 2% and 7% for OTCQX as strengthened criteria reduced the count. Positively, after a subdued period for sales, new additions increased for both premium markets, OTCQX and OTCQB, following a greater focus on this area during FY16.
The trading background for OTCM is sensitive to a range of macro factors that influence corporate confidence and activity in the equity market. With the US economy showing resilience this should provide a reasonable underpinning despite fluctuating views on the prospects for implementation of the Trump administration’s agenda. Also, subscription-type income accounts for the majority of revenue (we estimate over 80%), providing a measure of stability. We have broadly maintained our revenue estimates, but increased EPS forecasts by 4% and 2% for this year and next reflecting a lower assumed tax rate.
OTCM shares are trading on an FY17e P/E below information providers (which also enjoy a subscription income base) and in line with the average for global exchange comparators. For the following year its P/E is somewhat above both areas but, taking into account the output from our discounted cash flow model (page 9), we see a fair value of c $22 as reasonable (previously c $20).