For a financial institution besieged with bad news, the JSE seems to be doing just fine — financially speaking.
Recently released interim numbers were impressive, under the circumstances. And by that, IM means the ongoing shrinking of the JSE’s universe of listed stocks as smaller companies opt to delist. The JSE now plays host to fewer than 300 companies, though the collective market capitalisation of listed stocks is markedly higher than 10 years ago.
There are dark mutterings about the JSE no longer being relevant to smaller investors, even questions about its longer-term viability if exchange controls are ever lifted and local investors can easily access global stocks.
But it’s worth remembering the JSE has been operating for the best part of 14 decades — surviving wars, drought, unrest, financial crises and even the rinderpest. It’s been another challenging patch for the past handful of years, and hopefully the cycle will swing up again in the not-too-distant future. Until then, surely some encouragement should be taken from the fact that the JSE has endured this lean period on a sound financial footing.
The market certainly is not at all encouraged, with the share still close to a multiyear low of R88.63. At this point, JSE shares are attracting a yield of about 8.25% — the kind of rating usually attached to a company that is expected to undergo a steep decline in future earnings, or has gone “ex-growth”.
Our sister publication the FM has pointed out that the JSE now yields slightly higher than British American Tobacco — a cash-generative business with its core product in gradual terminal decline.
With a forward earnings multiple that might range between 7.5 and 9 times, the JSE is definitely not ranked with the sexier financial services or fintech stocks listed locally and abroad. The market rating is in line with the big four banks (leaving aside Capitec), despite the JSE still operating a virtual monopoly in terms of stock exchange services.
Its “biggest” rival, the A2X, offers mirror listings of existing JSE listings, tagged as a complementary venue to secondary list shares for trade. To date the JSE has not shown too much concern about smaller stock exchange rivals nibbling at its lunch, and the interim results made a brief notation of “market share maintained”.
In terms of numbers, the interim results probably surprised a little on the upside. In the six months to end-June, net profit after tax was up 10% to R493m, with headline earnings coming in 12% higher at 607.2c a share. Even top line shimmied up with total revenue up 5% to R1.45bn, driven by double-digit growth in information services and JSE Investor Services revenue. The JSE also saw an uptick in trading activity across its derivative markets.
While the core stock exchange business is still the default measure for most observers studying JSE prospects, more attention should probably be paid to diversification efforts.
CEO Leila Fourie pointed out that the JSE increased the proportion of its revenue derived from nontrading activity by two percentage points to 36%.
IM suspects this number could move closer to 45% in two years, with some newer initiatives still to hit full stride.
Though new listing activity has been slow (even if Premier Group and Copper 360 were popular new listings in recent months), it’s worth noting the sprightly growth in sustainability products and actively managed exchange traded funds. This is a vibrant area of business.
If there is one worry, it would be the marked hike in certain expenses, most notably a 15% increase in personnel-related expenses to R359m and a 21% jump in general operating expenditure to R182m. There are investors who hold the JSE could be a much tighter ship — something that might be easier to insist on if the group had pressure from major shareholders. Unfortunately, the JSE has ownership restrictions, which preclude an investment entity building a large activist stake.
If anything, shareholders will be reassured that cash generation remains strong — R488m in net cash was generated from operations. Even with an expected pick-up in capital expenditure in the second half, the final dividend payout should top last year’s 769c a share.
Cash on hand sits at R1.9bn with ring-fenced and nondistributable cash and bonds (regulatory capital and investor protection) topping R1.5bn.
Quite frankly, the JSE could afford to pay a special dividend and kick off a share buyback programme as well. A share buyback might be just the tonic to perk up sentiment.
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