OTC Market’s (OTCM) third-quarter results were consistent with our expectations and showed healthy revenue progress in each segment. This is a year of investment for the group in people, IT, a new headquarters and acquired businesses. Earnings are set to fall as a result, but we expect growth to resume in FY20 with longer-term benefits also likely to flow from the enhanced capabilities and infrastructure.
OTCM’s Q319 results showed revenues ahead 7% y-o-y with growth in all three segments (OTC Link, Market Data Licensing and Corporate Services). Investment in personnel and IT, higher rental costs following the move to a new HQ and costs associated with acquired businesses all contributed to a 17% increase in operating expenses. This meant profit before tax was 11% lower and net profit down 8% after a lower tax rate. With the results, OTCM announced it had entered into a strategic alliance with North Capital Investment Technology to provide companies with access to a cost-effective technology platform to enable them to manage online securities offerings, an area expected to develop substantially in the long-term.
US equity markets have shown strong gains year to date, but the macro background still has considerable uncertainties and venture markets have been much weaker, potentially acting as a near-term dampener for corporate activity in this area. Looking ahead, OTCM continues to focus on developing its transparent markets and offering additional or enhanced products/services to its corporate clients, data users and broker-dealer subscribers. A study by PwC has indicated that exchange-listed companies’ annual costs related to their listing run at between $1–2m, whereas companies on OTCQX and OTCQB typically spend between $50,000 and $300,000. Given this differential, the potential to broaden OTCM’s international client base and to address the opportunity provided by development of online fund-raising appears substantial.
Our earnings expectations for FY19 and FY20 are essentially unchanged. OTCM shares trade on prospective P/Es slightly lower than the global exchanges, and more markedly below those for information providers. Our fair value is unchanged at $37 per share.