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.
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.
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.
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.