Against a soft trading background OTC Markets Group (OTCM) delivered FY16 numbers slightly ahead of our expectation and the prior year. While the number of companies on its premium exchanges fell during the year there has been encouraging pick-up in new joiners in Q4 and early 2017. On a medium-term view the increased number of states, now 20, that grant OTCM markets Blue Sky recognition is important in helping draw in additional, good quality, corporate clients.
OTCM’s total revenues increased by just below 2% to $50.9m reflecting reduced market volatility that, together with a shrinking number of active brokers and the removal of quote fees, contributed to a 10% decline in the OTC Link ATS business. Market data remains the largest revenue contributor and made a small advance despite a slight reduction in the number of professional data users. The bright spot was corporate services (mainly subscription type revenue from companies on the premium markets) where the full year impact of earlier growth in company numbers at OTCQB in particular and increased fees drove a 10% increase. At the pre-tax profit level there was little change and earnings per share increased 2.4% on a lower tax charge.
As noted, there are some encouraging signs for the start of the current year with the rate of new company sign ups running at a higher level and the retention rate at the annual renewal point being up on the prior year despite increased fees. While equity market levels have also shown a positive trend that should be helpful for OTCM, risks do remain in the shape of potential global geopolitical developments including European elections, Brexit and policy development in the Trump administration. Competition and regulatory intervention are other factors to consider, but OTCM’s well-established network and a desire to trim back red tape in Washington should be positive factors on these fronts. Our estimate for FY17 is largely unchanged but may prove conservative given the positive start to the year
While our DCF model would point to a slightly lower valuation than before on unchanged assumptions ($18.00 versus $18.90), taking into account a peer comparison we think it is reasonable to assign a fair value of c $20, similar to the current share price (page 6).