TMX Group has a monopoly but can it grow?

TMX Group owns and operates trading exchanges in Canada. It provides listing markets, trading markets, clearing facilities, depository services, technology solutions, data products, and other services to the global financial community.

TMX is No.1 in Canada by the number of listed companies in global growth capital marketplaces. It is also the fourth largest exchange group by the number of international IPOs and new listings. 

TMX’s key operations include Toronto Stock Exchange, TSX Venture Exchange, TSX Alpha Exchange, The Canadian Depository for Securities, Montreal Exchange, Canadian Derivatives Clearing Corporation, and Trayport.

TMX Group caters to clients in Canada, North America, and also around the world. It currently has more than 3,200 listed securities issuers.

Investment Data
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Revenue Growth & Market Exposure

TMX’s revenue includes revenues from Capital Formation (21% revenues), Equities and Fixed Income Trading and Clearing (27%), Derivatives Trading and Clearing (15%), and Global Solutions, Insights and Analytics (37%) businesses. It plays a critical role in raising capital for companies around the world.

Over the years, TMX has transformed from a regional infrastructure provider to a global technology solutions provider. The acquisition of Trayport back in 2017 accelerated this transformation. The company also disposed of many of its non-core businesses in 2016 and 2017. 

In 2019 TSX and TSXV had 250 new listings, including 20 international listings and 130 new listings in the first half of 2020. Its unique TSXV Ecosystem drives new listings and revenue growth.

TMX Group benefits from a large and growing robust global pipeline of private companies. It engages growth companies, investors and intermediaries across the capital markets ecosystem. Growth investors are looking to tap sector-specific non-financial data and TMX captured the opportunity with the launch of mining and cannabis indices.

The company continues to focus on diversifying its revenue streams and shift to more recurring revenue sources. Recurring revenue now accounts for 52% of total revenues increasing from 40% in 2016.

It is highly diversified by product offerings and geographies. TMX’s revenue from outside of Canada increased to 33% from less than 30% in 2016. The Group’s revenues have grown at a rate of more than 19% CAGR in the last three years.

TMX witnessed increased capital markets activity during the third quarter, a surge in issuer financings on TSX and TSX Venture Exchange, and higher equities trading and clearing volume which drove higher revenues.

The company also announced an agreement to acquire AST Investor Services, Canada in September. This transaction is expected to accelerate TSX Trust’s growth, strengthen relationships with existing clients, and broaden the scope of its service offerings. Australia’s largest gold producer, Newcrest Mining also began trading on TSX in October.

TMX is targeting mid-single-digit revenue growth (CAGR) over the long term. Strong focus on expanding its addressable market, innovation across client and transaction experience, and diversification should drive long-term revenue growth.

Dividends

TMX has a track record of outperforming major North American indices. It sports an annual yield of 2.2% and a reasonable payout ratio of 62%. It last raised its dividend by 11% and has grown it at a rate of 15%+ CAGR in the last three years.

TMX has raised its annual dividend for the fifth straight year and should soon make it to the list of Canadian Dividend Aristocrat.

TMX will continue its fast pace of organic growth as more securities list on its exchanges. Its streamlined operating model has supported revenue and earnings growth. The company expects to drive future growth on the back of potential business areas like Trayport, Derivatives, and Capital Formation.

Derivatives trading is gaining momentum in Canada and also globally. TMX is expanding its existing international sales networks in foreign markets. The group is also well-positioned to capitalize on secular energy market trends with globalization and digitization of markets.

The company made a breakthrough in the U.S. energy market with Trayport making an agreement with Nodal Exchange .

TMX is targeting double-digit earnings growth over the long term. Growing global addressable markets and TMX’s ability to build new capabilities should facilitate this growth. It is already a primary network for European wholesale energy markets and has been supporting the growth of global energy trading markets.

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Competition

The TMX Group faces no significant competition in Canada. The company has strong organic and regulatory competitive barriers.

The volatile economic and market environment has contributed to less favorable conditions for capital raising in 2020.

TMX is a leader amongst Exchange groups. A complementary set of assets and a disciplined approach to cost management are its compelling competitive strengths.

Bottom Line

The COVID-19 pandemic has had an unprecedented impact on the market and general economic conditions.

However, TMX has been witnessing a positive shift in momentum in the Capital Formation business and high profile IPOs and new listings in mining and resources and other innovative sectors. A robust global pipeline has enabled TMX to build a global platform.

New listings should provide increasing annual recurring revenue, as listed firms pay annual fees to the exchange. Investments in core business systems and foundational infrastructure as well as client-centric product development position TMX well for long-term organic growth.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.