Toronto, Canada – TMX Group is the owner and operator of the Toronto Stock Exchange and TSX Venture Exchange. The company’s core competencies include exchange operations, ownership of TSX Trust, the Montreal Exchange, TSX Alpha Exchange, Shorcan, CDCC, CDS, TMX Datalinx, Trayport, and the recent acquisition of VettaFi. This article provides an update on the investment thesis for TMX Group, including insights on the integration of VettaFi, commentary from the recent Investor Day, and an analysis of the company’s valuation and business outlook.
In a previous analysis of TMX Group, it was noted that owning exchanges for equities, fixed income, derivatives, and commodities provides the company with attractive business attributes. As highly regulated entities overseen by the Investment Industry Regulatory Organization of Canada (IIROC), exchanges have high barriers to entry, creating a competitive advantage for established players like TMX. With its strong market dominance in Canada and limited competition, TMX benefits from its irreplaceable infrastructure and pricing power.
TMX Group has demonstrated strong financial performance over the years, with compounded annual growth rates (CAGR) of revenues and EBITDA at 14.1% and 19.3% respectively over the last decade. The company’s recent growth has accelerated, with revenues compounding at 23.0% and EBITDA at 29.4% over the last five years. This growth has been driven by consistent listing fees and a resilient business model that is relatively recession-proof.
In its most recent quarterly results, TMX reported a revenue increase of 16% compared to the previous year, with earnings per share (EPS) up by 3%. The acquisition of VettaFi, a US-based company specializing in indexing, digital distribution, and analytics, has bolstered TMX’s international expansion efforts. VettaFi’s strong performance and potential for growth, coupled with strategic synergies with TMX’s existing Canadian relationships, position the company for continued success.
Additionally, TMX’s European energy trading business, Trayport, saw revenue growth of 21% year-over-year, reflecting a positive trajectory in subscriber numbers and revenue. The company’s focus on expense control, coupled with a strong balance sheet and credit profile, further reinforces its solid financial position.
During its Investor Day, TMX outlined its growth strategy, targeting revenue of $2 billion by 2029. The company aims to achieve double-digit earnings growth over time, driven by growth in equity and fixed-income trading, derivatives business, and other segments. With a focus on margin expansion and higher growth businesses, TMX’s long-term outlook appears promising.
In terms of valuation, TMX currently trades at a premium compared to its historical averages, reflecting its improved growth profile. Analysts are optimistic about the company’s revenue growth potential, leading to an upgrade in the stock rating from ‘hold’ to ‘buy’. Despite potential risks such as organic revenue growth and debt reduction challenges, TMX’s strong business fundamentals and growth prospects make it an attractive investment opportunity.
Overall, TMX Group presents a compelling investment case with a resilient business model, strong financial performance, and a clear path for future growth. With a focus on expanding margins and leveraging its diverse business portfolio, TMX is well-positioned for continued success in the evolving financial markets landscape.
