TMX Group Profit Tops Estimates on Lower Operating Costs

TMX Group Ltd., owner of the Toronto Stock Exchange, reported third-quarter adjusted profit that beat analysts’ estimates, as cost reductions overshadowed a drop in revenue caused by lower trading volume.

TMX’s net income was C$19.2 million ($18.5 million), or 35 cents a share, the Toronto-based company said today in a statement. Revenue was C$165.3 million, down 7 percent compared with the second quarter and short of analysts’ projections of C$175.6 million. The numbers from a year earlier aren’t strictly comparable because a new company was formed by the sale of the exchange owner to a group of banks and pension funds.

“It’s clear the Canadian capital markets continue to be sluggish, particularly in equities financing and trading,” said Tom Kloet, chief executive officer of TMX, in a conference call. “We are confident the tide will turn in time.”

Shares of TMX rose 2.3 percent to C$48.12 at 4 p.m. in Toronto, the biggest gain in three months.

TMX reported profit of 75 Canadian cents a share excluding some items, beating the 74-Canadian cent average estimate of analysts surveyed by Bloomberg.

The stock has lost 7.3 percent this year through yesterday and is lagging the S&P/TSX Financials Index, which has rallied 16 percent in 2013. TMX has one buy, four holds and five sell ratings, according to analyst recommendations compiled by Bloomberg. The average one-year price target is C$46.44, implying a 1.3 percent decrease from yesterday’s close.

Cost Savings

TMX’s operating expenses of C$106.4 million last quarter fell 7 percent compared with the second quarter. The company is now on track to achieve C$28 million in annualized savings, compared with previous projections of C$20 million, Kloet said.

Combined trading volume of about 31.6 billion shares across the Toronto Stock Exchange, Venture exchange, Alpha and TMX Select fell 9.6 percent in the quarter compared with year-ago figures, Carolyn Quick, a spokeswoman with TMX, said in a phone interview. TMX handled 469 financings in the third quarter, down from 529 a year ago, Kloet said.

The exchange operator was acquired last September by a group of Canadian banks and pension funds as part of a C$3.73 billion takeover that combined its competitor, Alpha Group, and the Canadian Depository for Securities Ltd. clearinghouse.

“TMX has seen its market share in cash equity trading slide significantly since it closed the acquisition of Alpha, and more competition looms on the horizon,” said Paul Holden, analyst with CIBC World Markets, in a report to clients Oct. 28. “Legitimate competition puts earnings pressure on TMX.”

Growing Competition

Holden estimates TMX’s market share of cash equity trading dropped to 77 percent in the third quarter, from 83 percent a year ago.

The Chi-X Canada alternative trading system, owned by a unit of Chi-X Global Holdings LLC, has boosted its market share in the country to 18 percent from 10 percent in the past year since introducing a second venue called CX2, Holden said.

Royal Bank of Canada, the nation’s largest lender, along with partners including Barclays Plc and Toronto investment firm CI Financial Corp., announced in June plans to build a new exchange through Aequitas Innovations Inc., targeted at investors concerned with the rise of high-frequency trading.

Operators have been competing for a smaller number of transactions. Trading volume on Canadian exchanges has averaged 703.4 million shares a day in 2013 through yesterday, down 9.5 percent from 2012’s full-year average of 777.3 million, data compiled by Bloomberg show.

Volume Data

The trend has shown signs of reversing in recent months as Canadian equities have rallied. Trading volumes on the Toronto Stock Exchange rose 4 percent in October, the third year-over-year increase in the measure in the past four months, according to data from TMX.

The Standard & Poor’s/TSX Composite Index has jumped 10 percent since June 28, on track for the biggest six-month advance since 2010 as accelerating economic growth in China and central bank stimulus has boosted prices for oil and mining companies.

“I’m an incurable optimist, and you have improving markets,” Thomas Caldwell, chief executive officer with Caldwell Securities Ltd, said in a Nov. 4 interview. The firm manages about C$1 billion, including shares of TMX. “There is an optimism there and people are starting to see equities as a safe place. If you don’t see volumes pick up right away this quarter, they will in the next.”

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