OTC Markets Group — Acceleration in corporate client signings

OTC Markets Group (US: OTCM)

Last close As at 27/03/2024

55.78

0.74 (1.34%)

Market capitalisation

661m

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Research: Financials

OTC Markets Group — Acceleration in corporate client signings

OTC Markets Group’s (OTCM) first quarter results showed progress with revenues up 5% and pre-tax profits 12% ahead of Q116. While the corporate client count was down, there are encouraging signs of an improvement in the rate of new additions. OTCM continues to refine the rules for its premium markets to enhance their reputation while minimising the burden on corporates. The drive to increase the number of states that grant OTCM markets Blue Sky recognition continues as a further means to increase their appeal to corporates. OTCM is also taking a measured approach in its response to the competitive threat from the Global OTC ATS.

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Financials

OTC Markets Group

Acceleration in corporate client signings

Q117 results

Financial services

26 May 2017

Price

US$22.50

Market cap

US$257m

Net cash ($m) at 31 March 2017

23.5

Shares in issue

11.4m

Free float

60%

Code

OTCM

Primary exchange

OTCQX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.9

12.5

34.3

Rel (local)

4.7

10.3

16.3

52-week high/low

US$23.0

US$16.2

Business description

OTC Markets Group operates the OTCQX, OTCQB and Pink financial markets for c 10,000 US and global securities. Its trading system, OTC Link ATS, is operated by OTC Link LLC, a member of FINRA and is an SEC-regulated Alternative Trading System.

Next events

Q2 results

2 August 2017

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Julian Roberts

+44 (0)20 3077 5748

OTC Markets Group is a research client of Edison Investment Research Limited

OTC Markets Group’s (OTCM) first quarter results showed progress with revenues up 5% and pre-tax profits 12% ahead of Q116. While the corporate client count was down, there are encouraging signs of an improvement in the rate of new additions. OTCM continues to refine the rules for its premium markets to enhance their reputation while minimising the burden on corporates. The drive to increase the number of states that grant OTCM markets Blue Sky recognition continues as a further means to increase their appeal to corporates. OTCM is also taking a measured approach in its response to the competitive threat from the Global OTC ATS.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS**
($)

P/E
(x)

Yield
(%)

12/15

49.9

16.9

0.88

1.08

25.6

4.8

12/16

50.9

16.9

0.95

1.16

23.7

5.2

12/17e

53.8

17.6

0.96

1.20

23.4

5.3

12/18e

55.9

18.1

0.97

1.22

23.2

5.4

Note: *Fully diluted and calculated after restricted stock awards and excluding exceptional items and amortisation of acquired intangibles. **Including special declared dividends of $0.6 for 2015 and 2016, and an estimated $0.6 for 2017 and 2018.

Q117 shows revival in corporate signings

Within the 5% Q117 revenue increase corporate services was the main contributor to growth, driven principally by a price increase implemented at OTCQX. Revenue for OTC Link ATS (trading services) was down reflecting continued contraction in the number of broker-dealer subscribers, while market data revenues showed a modest increase helped by a large increase in non-professional users. The total number of client companies was down 2% and 7% for OTCQX as strengthened criteria reduced the count. Positively, after a subdued period for sales, new additions increased for both premium markets, OTCQX and OTCQB, following a greater focus on this area during FY16.

Changeable backdrop, but generally positive outlook

The trading background for OTCM is sensitive to a range of macro factors that influence corporate confidence and activity in the equity market. With the US economy showing resilience this should provide a reasonable underpinning despite fluctuating views on the prospects for implementation of the Trump administration’s agenda. Also, subscription-type income accounts for the majority of revenue (we estimate over 80%), providing a measure of stability. We have broadly maintained our revenue estimates, but increased EPS forecasts by 4% and 2% for this year and next reflecting a lower assumed tax rate.

Valuation: Increased and similar to share price

OTCM shares are trading on an FY17e P/E below information providers (which also enjoy a subscription income base) and in line with the average for global exchange comparators. For the following year its P/E is somewhat above both areas but, taking into account the output from our discounted cash flow model (page 9), we see a fair value of c $22 as reasonable (previously c $20).

Investment summary

Company description: Transparent cost-effective markets

OTCM’s strategy is to build business-friendly markets for global and US companies with an emphasis on ensuring that information on corporates is widely available through open networks to help investors make informed choices. The tiered markets it operates further this objective by applying graduated criteria, which suit a range of companies capable of meeting different standards of disclosure while providing a venue for broker-dealer subscribers to facilitate trade across a spectrum of issuers. We estimate that over 80% of revenue can be described as subscription in nature rather than being transactional. This includes broker-dealer subscriptions, market data licences and initial and annual charges for companies on the premium OTCQX and OTCQB markets. OTCM aims to provide a service that is less onerous both in terms of administration and cost compared with listing on a national securities exchange such as Nasdaq.

Valuation: Broadly supported by comparator ratings

On a P/E comparison with information providers and exchanges, OTCM trades below the FY17e average for information providers and in line with the exchanges, while it trades modestly above both averages for FY18e (based on estimates taken from Bloomberg for the comparators). Setting drivers within our discounted cash flow model such that the valuation is in line with the current share price includes an assumption of long-term cash flow growth of 3%, a discount rate of 9% and a terminal cash flow multiple of between 16x and 17x. Taking this and the comparison of P/E multiples into account we increase our fair value to a level of c $22 compared with c $20 previously.

Financials: Revenue estimates held and EPS increased

Our total revenue estimates are broadly unchanged but we have allowed for more cautious assumptions for OTC Link ATS to reflect the continued contraction in the number of broker-dealer subscribers, a trend that shows no sign of abating. Slightly higher assumptions for the other segments, including allowance for an improvement in the number of new corporate clients signed up combined with the increase in fees for OTCQX, results in a maintained overall top-line forecast.

Sensitivities: Competition, regulation and technology

There is a range of sensitivities to consider including the macroeconomic and equity market background that may have a bearing on the level of corporate activity and appetite to seek a venue for trading shares. More specifically, we would pick out competition, regulation and technology as areas that are important for OTCM.

Competition: OTCM to some extent competes for corporate clients with national securities exchanges and for broker-dealer transactional flow has a direct competitor in the shape of Global OTC. Nevertheless, it has the advantage of an existing large market share and broker-dealer subscriber base for which switching or adding a platform entails increased costs.

Regulation: may have a positive or negative influence on OTCM. For example, regulation designed to facilitate new forms of equity fund-raising including crowdfunding could have a very positive effect on the potential pool of corporate clients. Negatively, Regulation Systems Compliance and Integrity (SCI) imposes additional costs of compliance on OTCM and future spending requirements may be material.

Technology: OTCM has successfully focused on increasing the resilience of its OTC Link ATS such that it has extended its 100% uptime record to over two years.

A provider of informed, reliable and efficient markets

The creation of OTCM in its current form began with the purchase of the National Quotation Bureau (NQB) in 1997 by a group of investors led by CEO, R Cromwell Coulson. NQB aggregated broker-dealer quotes for securities traded off exchange and published the resulting information in paper form: the Pink Sheets. Under new management the company employed technology to provide greater efficiency and improved transparency, beginning the move to a real-time electronic platform for broker-dealers to price and trade equities. Launched in 2003, this system evolved into the current, SEC-registered, OTC Link Alternative Trading System (ATS).

At the end of Q117 OTCM ATS had 99 active, broker-dealer participants and carried quotes in more than 9,600 securities. To help investors assess risk-pricing, companies are organised into three markets that are tiered based on the timeliness, quality and quantity of information they provide:

OTCQX Best Market: for investor-focused companies that meet high financial standards, are current in their disclosure and have third-party sponsors. At end Q117 there were 363 OTCQX companies and at the end of 2016, 60% were international and 40% US companies, approximately half of which were banks.

OTCQB Venture Market: for developing companies meeting standards that promote price transparency and facilitate public disclosure. OTCM believes many companies listed on TSX Venture, LSE AIM and other non-US venture exchanges could be served by the OTCQB Venture Market. At end Q117 there were 929 company clients on OTCQB.

Pink Open Market: for all types of companies that do not meet the criteria for OTCQX and OTCQB; the companies included are further organised based on the quantity and timeliness of disclosure (Current, Limited and No Information).

OTC Link ATS contributed 20% of revenue in the first quarter with Market Data Licensing and Corporate Services each contributing c 40%. For access to OTCM Link ATS, broker dealers pay subscription fees, quote fees for Pink securities and messaging fees. Market data licensing provides access to real-time and historical pricing data, together with corporate financial information and compliance data. Market data are disseminated through over 50 distributors such as Bloomberg, Interactive Data Corporation, Thomson Reuters and Fidessa and via enterprise-level licensing arrangements. Corporate services revenues are mainly generated from fixed application and annual charges to companies on the premium OTCQX and OTCQB markets (nearly 80% of segmental revenues). Pink companies may subscribe separately to disclosure, news and other services.

Revenues have grown at an annual compound rate of 13% between 2007 and 2016, with the most rapid growth (32% CAGR) seen in the Corporate Services business segment (Exhibit 1).

Exhibit 1: Gross revenue evolution and analysis

Source: OTC Markets Group

Q117 results: Revenue, margin and profit improvement

OTC Markets’ first-quarter figures showed net revenues up nearly 5% and pre-tax profit more than 12% ahead compared with the same period last year. Revenue growth was most marked in the corporate services area where the main driver was the implementation of a price increase at OTCQX, while OTC Link ATS saw a moderate decline as the contraction in the number of broker-dealer subscribers continued. Market Data Licensing reported a modest increase in revenue with a strong increase in the number of non-professional users and demand for compliance data products being positive factors, while the number of professional users was only marginally down.

Importantly, while the corporate client count was down versus the end of March last year, the rate of new additions has improved over the last two quarters, suggesting OTCM’s focus on client acquisition is bearing fruit (see comments below).

Key data points from the first-quarter results (Q117 versus Q116 unless stated) included:

Among the operating metrics by business line, for OTC Link ATS the number of active broker-dealer subscribers (99) was down 15%. The trading system has maintained its 100% uptime record, which now extends over more than two years. Total clients (1,967) for corporate services were 2% lower and down 7% for OTCQX to 363. OTCQX has tightened its eligibility criteria and as at 1/1/17 26 companies did not meet the requirements but, this aside, the retention rate for calendar 2017 has improved. Also positively, the rate of new additions at OTCQX increased from 13 to 16 and from 56 to 82 for OTCQB.

The overall revenue increase of 4.9% included a sharper 13.6% increase for corporate services. As noted, an important factor here was the increase in the annual fee for existing clients in OTCQX from $15,000 to $20,000.

Expenses increased by less than 2% with compensation and IT costs up by 5-6%, while consulting and marketing costs were down by 30% and 14% respectively, the latter partly reflecting a move towards digital marketing.

As a result, the operating margin increased from 31% to 33% and pre-tax profit was up by 12.2%. Changes in accounting for stock-based compensation resulted in a lower tax charge (an effective rate of 28% versus 39%) with the effect set to be concentrated in the first quarter each year in line with vesting schedules. This allowed diluted earnings per share to increase by 31% to $0.26.

A $0.14 quarterly dividend was declared, the eighth at this level.

Exhibit 2: Q117 results summary

($000s unless stated)

Q116

Q316

Q416

Q117

% change vs Q116

% change vs Q416

OTC Link ATS

2,754

2,530

2,631

2,618

(4.9)

(0.5)

Market data licensing

5,325

5,274

5,218

5,450

2.3

4.4

Corporate services

4,672

4,809

5,029

5,308

13.6

5.5

Gross revenues

12,751

12,613

12,878

13,376

4.9

3.9

Re-distribution fees and rebates

(593)

(557)

(583)

(624)

5.2

7.0

Net revenue

12,158

12,056

12,295

12,752

4.9

3.7

Operating expenses

(8,361)

(7,658)

(7,683)

(8,514)

1.8

10.8

Income from operations

3,797

4,398

4,612

4,238

11.6

(8.1)

Other income / net interest

(8)

11

2

14

N/A

N/A

Income before provision for income taxes

3,789

4,409

4,614

4,252

12.2

(7.8)

Taxes

(1,474)

(1,404)

(1,921)

(1,202)

(18.5)

(37.4)

Net income

2,315

3,005

2,693

3,050

31.7

13.3

Diluted EPS $

0.20

0.26

0.23

0.26

31.0

11.8

Operating margin

31%

36%

38%

33%

Source: OTCM, Edison Investment Research

The following table provides a summary of key operating metrics, together with related revenue data. In addition to the points mentioned above, we note the increase in revenue per client within Corporate Services, reflecting the price increase at OTCQX and a degree of average revenue dilution per user in Market Data Licensing, reflecting the growth in non-professional users.

Exhibit 3: Operating and related revenue data

Q116

Q316

Q416

Q117

% chg
y-o-y

% chg
q-o-q

OTC Link ATS

Number of securities quoted

9,819

9,644

9,633

9,638

(1.8)

0.1

Number of active participants

116

108

106

99

(14.7)

(6.6)

Revenue per security quoted ($)

280

262

273

272

(3.2)

(0.5)

Revenue per average active participant ($)

23,741

23,000

24,589

25,541

7.6

3.9

Revenue bps of volume traded

0.61

0.54

0.46

0.47

(23.5)

1.8

Corporate Services

Number of corporate clients

OTCQX

388

387

398

363

(6.4)

(8.8)

OTCQB

929

869

872

928

(0.1)

6.4

Pink

686

693

665

676

(1.5)

1.7

Total

2,003

1,949

1,935

1,967

(1.8)

1.7

Revenue per client ($)

2,333

2,467

2,599

2,699

15.7

3.8

Market Data Licensing

Market data professional users

20,923

22,096

20,628

20,700

(1.1)

0.3

Market data non-professional users

11,418

11,472

12,839

16,022

40.3

24.8

Revenue per user (total)

165

157

156

148

(9.9)

(4.8)

Source: OTCM, Edison Investment Research

Other business and regulatory developments

OTCM is continuing to work with the North American Securities Administrators Association and individual state regulators to increase the number of states that accept the disclosure provided by OTCQX and OTCQB for the purpose of Blue Sky recognitions, which generally allow investment professionals to recommend qualifying securities to investors or purchase them for managed portfolios. In Q117 one further state (Delaware) was added to the list that recognises OTCQX, taking the total to 21 while 18 recognise OTCQB. The pace of additions appears to have slowed (between its H116 announcement and the FY16 announcement 15 states were added to the list), but OTCM notes that a number of states have announced a proposed rule change and this tends to take longer than if the change were through no-action letters and administrative actions.

The enhancement of OTCQX rules implemented in January this year should not only increase investor appreciation of the tiering between the markets, but may also help in the process of securing Blue Sky recognitions. Further recognitions in turn seem likely to enhance the reputation of OTCM’s two premium markets and increase their appeal to corporates as a venue for trading.

Exhibit 4: Blue Sky recognition for OTCQX and OTCQB

State

Recognition

State

Recognition

Alaska

Both

New Mexico

Both

Arkansas

Both

Ohio

Both

Colorado

Both

Oregon

Both

Delaware

Both

Rhode Island

Both

Georgia

Both

South Dakota

Both

Idaho

OTCQX only

Texas

Both

Iowa

Both

Vermont

OTCQX only

Kansas

OTCQX only

Washington

Both

Mississippi

Both

Wisconsin

Both

Nebraska

Both

Wyoming

Both

New Jersey

Both

Source: OTCM

A further rule change for OTCQX implemented in January was the removal of the requirement for an annual certification from an OTCQX professional adviser and that corporates’ information should be published in a recognised securities manual, lightening the administrative burden. For OTCQB a proposed amendment to standards will allow companies to qualify by following OTCM’s Alternative Reporting Standard (for US companies not reporting to the SEC) and similar corporate governance standards to OTCQX companies.

The Transfer Agent Verified Shares Program is another initiative to improve transparency by giving timely information on share issuance/share count, which helps investors to monitor potential dilution of their interests. Following its launch last year, during which seven agents signed up, the number of agents participating has increased to 10.

A potentially significant change in the competitive landscape is the move by Global OTC, a subsidiary of NYSE, to remove its quotes from OTC Link ATS, and to start operating a more directly competing alternative trading system employing a fully automated trading platform with a lit limit order book and auctions. Global OTC also provides real-time trade and quote data to investors, broker-dealers and market data distributors. Global OTC trades approximately 4,000 OTC securities and plans to trade all 10,000 securities by the end of 2017. The current fee structure is an execution charge of $0.003 per share (share price above $1.00) for liquidity removal with no rebate for adding liquidity. From the beginning of June incentives for monthly executed liquidity provided will apply, giving lower execution charges of $0.002 (1m to 50m shares) and $0.001 (over 50m shares) per share for liquidity removed. Data feeds are provided free of charge currently but charges will apply from the beginning of July. Global OTC implemented its plan at the beginning of May and early data indicate an average market share of c 9%. Based on these data, we estimate that OTC Link ATS has a market share of approximately 50% and understand that the remaining activity is accounted for by trades negotiated directly between broker dealers. Global OTC remains a trade messaging subscriber to OTC Link ATS as most of the trading carried out on the platform is with OTC Link ATS liquidity providers.

In response to this development OTCM has enhanced its system to allow OTC Link ATS subscribers to see aggregated market data and to route orders to Global OTC, limiting any disruption for its clients that might otherwise arise. OTCM notes that the loss of Global OTC as a subscriber will have a minimal impact on revenue but that it is too early to determine the competitive impact of its order book-based offering. We would observe that volume on the Global OTC platform may generate activity on OTC Link ATS as broker-dealers offset trades while related messaging revenues are likely to continue to flow to OTCM given the position of OTC Link ATS subscribers in this market. The longer-term impact on OTCM revenues for both OTC Link ATS and data licensing will hinge on whether Global OTC or any other inter-dealer quotation system is able to take a substantially higher market share. Also uncertain are the possible implications for the participation of smaller broker-dealers in the OTC market given the increase in costs arising from market fragmentation.

The presence of a credible competitor with a live trading system may reduce the chances of FINRA pursuing its proposal for an over-the-counter display facility (ODF, August 2016). This would act as a back-up to OTC Link ATS and appears to reflect concerns at the SEC regarding the availability of alternative channels in the event of a system failure. The proposal has been through an initial consultation period that only elicited three responses, each arguing against the adoption of the rule, and FINRA has not made any further announcement or submitted the proposal to the SEC.

Current trading environment and outlook

We start by looking at recent trends in the equity capital markets background for OTCM. The volume of IPOs has been mixed across markets. At Nasdaq (Exhibit 5) the number of IPOs has been on a steep downtrend since a peak in 2014 and annualising the first quarter rate (giving 68 IPOs) would represent a further marked reduction. By contrast, the Canadian TMX markets’ year to date (end April) annualised run rate of IPOs is well ahead of 2016 (+55% for TSX and +83% for TSX Ventures – Exhibit 6).

Exhibit 5: Nasdaq – number of IPOs

Exhibit 6: TSX and TSX Venture – number of IPOs

Source: Nasdaq

Source: TMX. Note: 2017 ytd is to end April.

Exhibit 5: Nasdaq – number of IPOs

Source: Nasdaq

Exhibit 6: TSX and TSX Venture – number of IPOs

Source: TMX. Note: 2017 ytd is to end April.

In the UK the level of IPOs has been subdued and year to date AIM IPOs are down 25% on an annualised basis compared with the 2016 level. Brexit-related concerns and, arguably, the announcement of an early general election may not be conducive to new issuance, but brokers report good pipelines of transactions.

The positive market response to the US election has dissipated to some extent as campaign statements have given way to the challenges of implementation. Nevertheless, the market performance in the US (and the UK and Canada) has generally been positive (see Exhibit 7), helped by resilient economic trends. If maintained this should create an increasingly favourable environment for IPOs.

Exhibit 7: AIM number of admissions

Exhibit 8: Six-month index performance (US$ terms)

Source: AIM. Note: To end April.

Source: Bloomberg. Note: Total return, to 22 May 2017.

Exhibit 7: AIM number of admissions

Source: AIM. Note: To end April.

Exhibit 8: Six-month index performance (US$ terms)

Source: Bloomberg. Note: Total return, to 22 May 2017.

For OTCM itself, as noted earlier, the trend in new client additions has improved in the last two quarters and the retention rate at OTCQX was higher at 93% for 2017 compared with 89% in 2016. OTCM continues its work to increase the number of Blue Sky recognitions and has refined its premium market requirements to enhance the reputation of its markets and to reduce the administrative burden on and contain costs for corporate clients.

The arrival of Global OTC ATS as a direct competitor for OTCM Link ATS does increase uncertainty in an area where the contracting number of broker-dealers is already pressuring revenues. However, as noted earlier, OTCM expects the initial impact on revenues to be limited and is focusing on enhancing its services to broker-dealers to address the challenge.

On a medium- to longer-term view, OTCM is positive on the potential impact of the development of online or crowdfunded capital-raising facilitated by the Jumpstart Our Business Startups (JOBS) Act (including Regulation A+ and Regulation Crowdfunding). As online funding matures OTCM sees good potential for these developing companies to be attracted to trading on its markets. OTCM aims for the costs for its corporate clients to be less than half the level of national securities exchanges, while companies would also benefit from a lower administrative burden. OTCM is joining others in pushing for Regulation A to be extended to SEC reporting companies to expand the number of developing companies that can take advantage of less burdensome means of raising capital. It may be the case that a contraction in the number of US-listed companies creates a favourable backdrop for this and other measures that ease the path for growing companies to raise fresh equity.

Our next two charts compare the number of professional and non-professional users of OTCM’s market data and users of UTP (Nasdaq). For professional users there are only small changes for both OTCM and UTP, although the OTCM figure is marginally up rather than down. For non-professional users there was a marked increase for both OTCM and UTP in Q117. OTCM’s professional user base is equivalent to less than 8% of the UTP number, a relatively low penetration of the potential market. If OTCM can continue to build the reputation of its premium markets and new capital raising techniques gain traction, providing an increasing flow of attractive potential clients, there should be significant potential to increase market data revenue.

Exhibit 9: OTCM and UTP (Nasdaq) professional users

Exhibit 10: OTCM and UTP non-professional users

Source: OTCM, UTP Plan, Edison Investment Research

Source: OTCM, UTP Plan, Edison Investment Research

Exhibit 9: OTCM and UTP (Nasdaq) professional users

Source: OTCM, UTP Plan, Edison Investment Research

Exhibit 10: OTCM and UTP non-professional users

Source: OTCM, UTP Plan, Edison Investment Research

In summary, the economic background in the US, while still marked by some uncertainty, has shown resilience and is broadly positive. The pause in equity market strength following a buoyant post-presidential election period may detract from corporate activity in the near term, but on the other hand continued relatively low volatility should be favourable and markets have shown an ability to look through the ebb and flow of political developments. The competitive threat, highlighted by, but not confined to the Global OTC development, will need to be monitored but encouragement is provided by OTCM’s measures to address these and develop its premium markets. There is potential for negative regulatory measures but there is also scope for increased opportunities for OTCM if crowdfunding gains momentum, perhaps helped by further regulatory changes.

Financials

As shown in Exhibit 11 there are only minor changes in our estimates following the first quarter results, with revenues virtually unchanged, marginally lower pre-tax profit and modestly higher EPS reflecting the lower tax charge mentioned earlier. We look for revenue growth of between 5% and 6% this year followed by 4% for FY18. Segmentally, we have made more cautious assumptions for OTC Link ATS, reflecting the trading commentary earlier, balanced by slightly higher estimates in the other areas.

Exhibit 11: Earnings revisions

 

Gross revenue ($m)

PBT ($m)

EPS ($)

Dividend ($)

 

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

2017e

53.3

53.8

1

17.9

17.6

(2)

0.93

0.96

4

1.20

1.20

0

2018e

55.7

55.9

0

18.7

18.1

(3)

0.96

0.97

2

1.22

1.22

0

Source: Edison Investment Research

Operating cash flows in the first quarter were $1.7m ahead of the prior year ($0.8m) and sufficient to cover the dividend payment in the period ($1.6m). In addition to the dividend payment, OTCM bought back $1.4m of shares into treasury and this, with other small net outflows, resulted in a $1.5m reduction in cash since the year end to $23.5m. On our estimates for FY17 and FY18 year-end cash would be around $22m after allowing for the payment of further special dividends such that the overall level of dividend increases.

Valuation

Our comparative P/E table (Exhibit 12) includes major information providers MSCI and Markit (in recognition of OTCM’s subscription-based fees and market data exposure), together with global exchange averages and values for the S&P 500 index. OTCM trades within the range for the information providers and is trading above the FY17e and FY18e average P/Es for the exchanges. Further Blue Sky recognitions and confirmation of a pick-up in the environment for corporate activity would help underpin this rating, while the likely earnings upgrades that would accompany this scenario would be positive for valuation.

Exhibit 12: OTCM comparative multiples

Estimated P/E ratios (x)

FY17e

FY18e

MSCI

27.2

23.4

Markit

21.7

18.7

Average information providers

24.5

21.1

Average global exchanges

23.0

20.5

S&P 500

18.5

16.5

OTCM

23.3

23.1

Source: Bloomberg, Edison Investment Research. Note: Prices as at 23 May 2017.

Using our discounted cash flow model to determine a set of assumptions that would match the current share price, we find that a discount rate of 9%, long-term cash flow growth of 3% and a terminal multiple of 16.5x (arguably not excessive in comparison to the current year value of c 20x) would align the valuation with the current share price ($22.50). A sensitivity table shows the variation in implied valuation with changes in growth and discount rate assumptions.

Exhibit 13: Discounted cash flow valuation sensitivity ($ per share)

Discount rate (right)
2019-27e growth

7%

8%

9%

10%

11%

2%

24.4

22.8

21.3

20.0

18.7

3%

25.9

24.1

22.5

21.1

19.8

4%

27.5

25.6

23.9

22.3

20.9

5%

29.2

27.1

25.3

23.6

22.1

Source: Edison Investment Research

Taking into account the comparative valuations shown above and the potential DCF outputs on a range of assumptions, we see a fair value of c $22, similar to the current share price, as reasonable (previously c $20) with potential for upside with increased evidence of favourable trends in the market background.

Exhibit 14: Financial summary

$000s

2014

2015

2016

2017e

2018e

Year end 31 December

PROFIT & LOSS

OTC Link ATS

12,019

11,796

10,573

10,343

10,136

Market Data Licensing

20,334

20,610

21,054

21,900

22,557

Corporate Services

9,862

17,503

19,254

21,508

23,229

Revenue

42,215

49,909

50,881

53,751

55,922

Re-distribution fees and rebates

(2,388)

(2,379)

(2,317)

(2,514)

(2,575)

Net revenue

 

 

39,827

47,530

48,564

51,237

53,347

Operating expenses

(25,382)

(28,972)

(30,032)

(32,119)

(33,564)

EBITDA

 

 

14,445

18,558

18,532

19,118

19,782

Depreciation

(1,543)

(1,692)

(1,606)

(1,580)

(1,650)

Operating Profit

12,902

16,866

16,926

17,538

18,132

Net Interest

9

27

9

29

15

Profit Before Tax (norm)

 

 

12,911

16,893

16,935

17,567

18,147

Tax

(5,021)

(6,635)

(6,407)

(5,995)

(6,352)

Profit After Tax (FRS 3)

7,890

10,258

10,528

11,572

11,796

Profit After Tax (norm)

7,638

9,971

10,826

11,260

11,484

Fully diluted av. No. of shares (m)

11.1

11.3

11.3

11.7

11.8

EPS - normalised fully diluted (c)

 

 

68.58

88.32

95.47

96.41

97.50

Fully diluted EPS - FRS 3 ($)

 

 

70.50

90.58

97.60

98.52

99.61

Dividend per share (c)

82.00

108.00

116.00

120.00

122.00

EBITDA Margin (%)

36

39

38

37

37

Operating profit margin (%)

32

35

35

34

34

BALANCE SHEET

Non-current assets

 

 

 

 

 

 

 

Intangible Assets

291

291

291

291

291

Property and other

4,844

4,187

3,267

2,554

1,604

Current Assets

 

 

 

 

 

 

 

Debtors

5,674

6,082

6,262

5,853

5,853

Cash & cash investments

20,272

23,925

25,034

21,761

22,154

Other current assets

2,095

1,729

1,789

2,326

2,326

Current Liabilities

 

 

 

 

 

 

 

Deferred revenues

(9,521)

(12,737)

(14,664)

(14,572)

(14,572)

Other current liabilities

(4,450)

(5,063)

(5,372)

(3,581)

(3,581)

Long Term Liabilities

 

 

 

 

 

 

 

Tax, rent and other

(954)

(867)

(1,101)

(1,089)

(1,089)

Net Assets

 

 

18,251

17,547

15,506

13,543

12,986

NAV per share ($)

 

 

1.62

1.55

1.36

1.18

1.12

CASH FLOW

Operating Cash Flow

 

 

16,985

22,400

21,752

17,109

21,433

Net Interest

9

27

9

29

15

Tax

(4,492)

(5,320)

(6,021)

(4,541)

(6,352)

Capex

(1,582)

(940)

(415)

(602)

(700)

Financing / investments

(475)

(420)

(1,157)

(1,562)

0

Dividends

(9,109)

(12,094)

(13,059)

(13,706)

(14,004)

Net Cash Flow

1,336

3,653

1,109

(3,273)

393

Opening net (debt)/cash

 

 

18,936

20,272

23,925

25,034

21,761

Closing net (debt)/cash

 

 

20,272

23,925

25,034

21,761

22,154

Source: OTC Markets Group accounts, Edison Investment Research

Contact details

Revenue by geography

304 Hudson Street
3rd Floor
New York NY 10013
US
+1 (212) 896 4400
www.otcmarkets.com

Contact details

304 Hudson Street
3rd Floor
New York NY 10013
US
+1 (212) 896 4400
www.otcmarkets.com

Revenue by geography

Management team

CEO, president, director: R Cromwell Coulson

CFO: Beatrice (Bea) Ordonez

In 1997, Cromwell led a group of investors in acquiring OTCM’s predecessor business, the National Quotation Bureau (NQB). Prior to this, Cromwell was an institutional trader and portfolio manager in distressed and value-oriented investments.

Bea joined OTCM as CFO in 2015. She has more than 20 years of experience in the financial services industry including 13 years as COO and MD at Convergex, a global brokerage and trading-related services provider. She is a qualified chartered accountant (ICAEW) and worked at Arthur Andersen and PwC.

General counsel: Dan Zinn

Chairman: Neal Wolkoff

Dan Zinn joined in November 2010. Prior to joining OTCM, he was a partner at The Nelson Law Firm, LLC, and was outside counsel to the company. Dan previously worked in the corporate office of the American International Group (AIG).

Neal Wolkoff is a former executive of three exchanges (including being former chairman and CEO of AMEX and an executive officer at NYMEX). He is a consultant and attorney focusing on futures and securities markets, exchanges, market regulation, operations and clearing houses.

Management team

CEO, president, director: R Cromwell Coulson

In 1997, Cromwell led a group of investors in acquiring OTCM’s predecessor business, the National Quotation Bureau (NQB). Prior to this, Cromwell was an institutional trader and portfolio manager in distressed and value-oriented investments.

CFO: Beatrice (Bea) Ordonez

Bea joined OTCM as CFO in 2015. She has more than 20 years of experience in the financial services industry including 13 years as COO and MD at Convergex, a global brokerage and trading-related services provider. She is a qualified chartered accountant (ICAEW) and worked at Arthur Andersen and PwC.

General counsel: Dan Zinn

Dan Zinn joined in November 2010. Prior to joining OTCM, he was a partner at The Nelson Law Firm, LLC, and was outside counsel to the company. Dan previously worked in the corporate office of the American International Group (AIG).

Chairman: Neal Wolkoff

Neal Wolkoff is a former executive of three exchanges (including being former chairman and CEO of AMEX and an executive officer at NYMEX). He is a consultant and attorney focusing on futures and securities markets, exchanges, market regulation, operations and clearing houses.

Principal shareholders

(%)

Officers and directors

39.4%

Including R Cromwell Coulson, his wife and family trusts

31.4%

T Rowe Price

2.9%

Horizon Kinetics

1.0%

Companies named in this report

MSCI, Markit, Nasdaq

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by OTC Markets Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by OTC Markets Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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