TMX Group owns and operates trading exchanges in Canada. It provides listings, trading markets, clearing facilities, custody services, technology solutions, data products and other services to the global financial community.
TMX is # 1 by the number of publicly traded companies in the global growth capital markets. It is also the fourth largest stock exchange group by number of international IPOs and new listings.
TMX’s primary operations include the Toronto Stock Exchange, TSX Venture Exchange, TSX Alpha Exchange, Canadian Depository for Securities, Montreal Exchange, Canadian Derivatives Clearing Corporation, and Trayport.
The group serves customers in Canada, North America and also around the world. It currently has more than 3,200 listed securities issuers. TMX’s robust pipeline has helped create a global platform.
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Sales growth & market presence
TMX’s revenues include capital formation revenues (24% revenue), equity and fixed income trading and clearing (27%), derivatives trading and clearing (15%), and global solutions, insights and analytics (34%). It plays a vital role in raising capital for companies around the world.
Over the years TMX has grown from a regional infrastructure provider to a global technology solutions provider. The acquisition of Trayport in 2017 accelerated that transformation. In 2016 and 2017, the company also sold many of its non-core businesses.
Recurring revenue now accounts for more than 50% of total revenue, up from 40% in 2016. The company continues to focus on diversifying its revenue streams and shifting to recurring revenue streams. The group’s total sales have grown at a rate of ~ 9% CAGR over the past three years. TMX is highly diversified in terms of product offerings and regions. Sales outside Canada rose from less than 30% in 2016 to 33%.
Its unique TSXV ecosystem drives new offerings and revenue growth. TMX Group benefits from a large and growing robust global pipeline of private companies. It integrates growth companies, investors and intermediaries in the entire capital market ecosystem. Growth investors are looking for industry-specific non-financial data, and TMX took the opportunity to launch mining and cannabis indices.
TMX is now focused on the second phase of modernizing its clearing platforms and expects this to be completed in the second half of 2022. TMX saw increased trading and clearing volume for cash equity markets due to increased retail activity. Compared to last year, new listings on the TSX increased 45% and the TSXV increased 57%, and there were 300 new listings last year.
The company announced an agreement in September to acquire AST Investor Services, Canada. The purpose of this transaction is to accelerate TSX Trust’s growth, strengthen relationships with existing customers and expand the scope of its service offering. TMX also agreed to take over 100% of the German company Tradesignal, a leading manufacturer of software for rule-based trading and technical chart analysis. A strong focus on expanding the addressable market, innovations in customer and transactional experience, and diversification should drive long-term revenue growth.
TMX is a Canadian dividend aristocrat with a track record of outperforming major North American indices. It has an annual return of more than 2% and a reasonable payout ratio of 52%. The company recently increased its dividend by 6% and has grown at a rate of 11% + CAGR over the past five years.
TMX will continue its rapid organic growth as more securities are listed on its exchanges. Its streamlined operating model has supported sales and earnings growth. The company expects to drive future growth through potential businesses such as trayport, derivatives and capital formation. Derivatives trading is gaining traction in Canada and around the world.
In addition, TMX is expanding its existing international sales networks in foreign markets. The group is also well positioned to capitalize on secular energy market trends with the globalization and digitization of markets. The company’s breakthrough in the US energy market came when Trayport reached an agreement with Nodal Exchange.
Growing global addressable markets and TMX’s ability to build new capabilities should enable long-term earnings growth. It is already a primary network for the European wholesale energy markets and has supported the growth of the global energy trading markets.
The TMX Group is not exposed to any significant competition in Canada. The company has strong organic and regulatory barriers to competition. TMX is the leader among the Exchange groups. A complementary set of assets and a disciplined approach to cost management are its compelling competitive strengths.
The COVID-19 pandemic is having an unprecedented impact on the market and general economic conditions. However, TMX is experiencing a positive shift in capital formation business and high profile initial public offerings and new listings in mining, resources and other innovative sectors.
TMX should benefit from increased funding activity on its exchanges and improved valuations as markets fully rebound. New listings should result in increased annual recurring income as listed companies pay annual fees to the stock market. Investments in core business systems and basic infrastructure as well as customer-centric product development position TMX well for long-term growth.