FNZC likes NZX's funds management business, lowers target

Broking house First NZ Capital sees NZX's funds management as one of its engines of growth, but has lowered its target share price until there's evidence that recent restructuring of the core market business is bearing fruit.

In a note to clients from analyst Greg Main, FNZC reduced its forecasts for NZX earnings before interest, tax, depreciation and amortisation by 3 percent and 4 percent for the 2018 and 2019 financial years respectively after the stock market operator reported lower than expected revenue in the third quarter of the current financial year. That led FNZC to reduce forecast fourth-quarter revenue "given the relatively subdued capital markets".

However, Main suggests NZX could increase income from heightened trading activity in response to equities market corrections that have been flowing through global bourses in recent weeks.

Stronger revenue for NZX's funds services business saw FNZC upgrade expectations for earnings from that part of the operation.

"NZX has the potential for incremental earnings growth driven by growth in its funds business, executing on its wealth technologies platform moving from loss-making to profitability and incremental gains for its core operations," wrote Main.

However, the exchange faces medium-term risks from the emergence of new ways to raise capital and trade securities, including competition from international exchanges.

While FNZC retained its 'neutral' rating on NZX shares, it downgraded its target share price from $1.14 to $1.06, partly because the well-performing funds business is being valued at a higher price-earnings ratio than international peers and because of a "likely lack of near-term catalysts for NZX".

Main notes recent commentary suggesting NZX faces an internal conflict of interest by running an exchange and a funds management business, but says "we have viewed NZX's core competency not as necessarily operating a financial market but in operating financial platforms and working within regulatory frameworks".

The funds management division provides useful diversification and NZX's KiwiSaver offerings are likely to find increasing favour with investors who seek a greater degree of personal control over the make-up of their KiwiSaver fund exposures, the FNZC note says.

It is also "a key driver of our forecast NZX earnings growth".

However, shareholders remained focused on whether NZX would succeed with its initiatives to deliver or at least retain value from its core operations.

"We expect NZX to continue to trade largely sideways" until evidence emerges that it can deliver structural earnings growth.

NZX shares were trading at $1.04 today, from $1.20 a year ago today.

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