OTC Markets Group’s first quarter figures were affected by the one-off costs of its headquarters move and investment in additional headcount and IT infrastructure, in part supporting incremental acquisitions. These investments are set to support future growth and, following more recent share price weakness and despite a reduction in our EPS estimates, the prospective P/E rating is now below that of peers.
OTC Markets Group (OTCM) reported gross revenue up 7% versus Q118 including 10% growth in Corporate Services, within which OTCQX Best market benefited from 16% corporate client growth, a particularly encouraging indicator. While Market Data Licensing growth appeared subdued at 4%, this was partly held back by the absence of one-off revenue that benefited Q118 and compliance data sales growth continued. OTC Link was affected by lower market activity levels, but this was more than offset by continuing traction at OTC Link ECN, which allowed revenue to grow by 7%. Operating expenses rose 15%, including one-off HQ move costs of c $0.5m, leaving pre-tax profits down 11% and diluted EPS, after a reduced tax charge, down 6%. Excluding one-off costs, net income would have risen 7%. The quarterly dividend has been maintained at $0.15.
Equity market performance year to date has been positive and, providing macro concerns including global trade tensions do not reverse this, the background for the corporate sector and therefore OTCM should remain relatively attractive. OTCM continues to focus on improving the transparency and regulatory recognition of its markets and, reflecting the progress made to date, we expect further gains on this front to benefit the reputation of its markets. In future, this could mesh with the development of online fund-raising, which may create a larger pool of companies interested in the cost-effective secondary trading platforms offered by OTCM.
Reflecting one-off and ongoing costs, our EPS estimates for FY19 and FY20 are reduced by 7% and 3% respectively. However, longer-term cash flows should benefit from investments in headcount and add-on acquisitions, so we maintain our estimated fair value at $37.