NZX says funds management a priority to deliver earnings

Thursday 4th October 2018

NZX has pushed back against shareholder complaints that it's adopted a faulty strategy, saying its funds management unit is a key plank for earnings growth.

Minority shareholder Elevation Capital this week launched a campaign to lobby for change at the stock market operator. It says escalating costs and a poorly defined strategy have led NZX's share price to underperform its peers and left dividends unchanged for the past four years.

NZX chair James Miller said the board is focused on lifting returns to shareholders. He defended the five-year strategy articulated to shareholders last year, saying non-core businesses have been sold in the past 11 months, customer service and business efficiencies have improved and market liquidity is increasing. That freed up capital for a special dividend, he said.

Miller said the board welcomed reasonable investor feedback, but noted there was a small group of shareholders applying public pressure to sell the funds management and wealth technologies units.

"Growing these passive products underpins the development of NZX, and the broader public market, while supporting several of our key strategic initiatives," Miller said. "These businesses are important for delivering earnings growth."

NZX expanded its funds management business under the leadership of Tim Bennett, buying SuperLife in 2014. The funds management unit hit its targets, meaning NZX paid the full $35 million. It paid $1.5 million for Apteryx, renamed to NZX Wealth Technologies, which didn't meet its earnout targets.

Elevation Capital owns 2.3 percent of NZX on behalf of its own clients. Managing director Chris Swasbrook is a member of NZX's markets disciplinary tribunal and listing sub-committee. Chair Craig Stobo is a veteran of the local markets and headed the government-appointed group to look at the viability of setting up a financial services back-office in New Zealand, while director Andrew Harmos is a founding partner of Harmos Horton Lusk and a former NZX chair.

Elevation wants NZX to spin out the funds management unit as a separate business owned by NZX's shareholders, which could then become a full service provider acquiring an active funds management business, private equity firm, or venture capital business. Elevation estimates NZX's funds management business could be worth $76.6 million to $83.5 million, or 27.9-to-30.5 cents per share, by 2020.

That could then let NZX focus on its core markets business to improve margins, explore possible horizontal integration into the unlicensed markets such as USX or crowd-funding, as well as trimming its executive team and board.

Elevation estimates the core NZX business could be valued at $427.4 million, or $1.59 a share, without including the upside of selling down stakes in its dairy derivatives unit or ceding its regulatory function to the Financial Markets Authority.

NZX shares last traded at $1.08, valuing the company at $293.5 million.

The fund manager was critical of NZX's decision to pursue memorandums of understanding with other stock exchanges, highlighting the number of executives and directors who travelled to New York to sign an MoU with Nasdaq.

Miller said that approach was an efficient way to invest with a lot of upside potential. He acknowledged shareholder concerns at the New York trip and said the board was always mindful of costs.

"This visit had a strong focus on listed customers, data, surveillance and technology, and both exchanges invested significant effort to ensure a long-lasting partnership is developed," he said.

Separately, NZX today signed a memorandum of understanding with the Shanghai Stock Exchange and said it wants to align with China's 'One Road, One Belt' strategy. The companies will seek to agree on a framework for closer development of the respective markets and representatives will meet early next year.

(BusinessDesk)

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