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.
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.
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.
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.