Background and overview of JSE (JSE):
The JSE is a key institutional feature of South Africa’s economic landscape, providing a Primary and a Secondary Market as well as post-trade and technology services. It also sells market data, and regulates the Primary and Secondary markets.
• The Exchange connects buyers and sellers in a variety of financial markets: ͵ Equities, Financial Derivatives, Commodity Derivatives, Currency Derivatives and Interest Rate Instruments.
• The JSE is licensed to operate under the Financial Markets Act, 19 of 2012, and is the largest African exchange by market capitalisation and value traded.
• The Exchange has global reach through its international investor base and range of tradable instruments, enabled by cutting-edge technology. It offers exposure to investments from South Africa, the African continent and further afield.
• The Exchange connects buyers and sellers in a variety of financial markets: ͵ Equities, Financial Derivatives, Commodity Derivatives, Currency Derivatives and Interest Rate Instruments.
• The JSE is licensed to operate under the Financial Markets Act, 19 of 2012, and is the largest African exchange by market capitalisation and value traded.
• The Exchange has global reach through its international investor base and range of tradable instruments, enabled by cutting-edge technology. It offers exposure to investments from South Africa, the African continent and further afield.
The JSE is currently the sole provider of stock market services in South Africa. Their monopoly in the sector and the high regulatory barries to entry makes the JSE a compelling investment case even before we review their financial results. We believe in value investing and cases like these where there is no real competition and barriers to entry will always offer a value investment proposition. This valuation is based on their latest interim results as published for 6months ended June 2016 on 12 August 2016.
Scroll over or click on the funnel chart to get more details of JSEs latest financial results
Financial review:
In our last review we mentioned news about an alternative listing board called ZAR X. In that review (read it here) we mentioned that it might take a long time before a competitor enters the market and offers the kind of service that the JSE is offering. The barriers to entry in this market is extremely high, with a lot of financial regulations that needs to be passed. And ZAR X wont be able to do that overnight. We therefore continue to state that JSE has a monopoly and no competitor will be stealing market share here anytime soon.
Their net profit margin is sitting at 45.11% which is extremely strong. Their earnings per share came in at R5.85 (putting them on a PE of around 13.6), which is not demanding at all considering they basically the monopoly as the only regulated stock exchange in South Africa. We feel they can easily get away with a valuation on PE level at closer to 20. They generated around R6.87 per share in cash from their operations. So a very strong cash generative business.
Since they dont have large retail outlets and a footprint across the country, and most of their operations are located in one central location, their overheads wont be astronomically high, part of the reason their margins are so strong.
And again we do not think that ZAR X will have a significant impact on the JSE's future earnings for some time and would still recommend buying JSE shares due to their foothold in the market they in.
Their net profit margin is sitting at 45.11% which is extremely strong. Their earnings per share came in at R5.85 (putting them on a PE of around 13.6), which is not demanding at all considering they basically the monopoly as the only regulated stock exchange in South Africa. We feel they can easily get away with a valuation on PE level at closer to 20. They generated around R6.87 per share in cash from their operations. So a very strong cash generative business.
Since they dont have large retail outlets and a footprint across the country, and most of their operations are located in one central location, their overheads wont be astronomically high, part of the reason their margins are so strong.
And again we do not think that ZAR X will have a significant impact on the JSE's future earnings for some time and would still recommend buying JSE shares due to their foothold in the market they in.
The graphic below shows the contribution of some of JSEs operating divisions to the JSE's revenue
As can be seen from the pie chart above, there are a large number of revenue streams for the JSE, and there is always the potential to add more as trading products become more innovative and sometimes more complex. A good thing is that the JSE is not overly dependent on just one product or service that they supply. We like the fact that they have a diverse revenue stream. As long as the JSE keeps track of this and ensures all products are traded regularly they should be smiling for a long while still. What is clear that the bulk of their revenue comes four groups which include:
- Equity Market Fees : 26%
- Post Trade Services: 19%
- Back Office Services (BDA): 13.6%
- Market Data Fees: 13.5%
A few financial ratios to mull over for JSE (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 0.35 (more than 2 shows high levels of financial leverage).
- Current Ratio: 2.92 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 2.92 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 13.30%
- Return on Equity (ROE): 17.96%
- Net Profit Margin: 45.11%
- Dividend Yield: 0.66%
Valuation:
Based on JSE's financial results, the markets they operate in and their "monopoly" on the trading services and stock exchange industry, we value the JSE at between R170.42 and R171. The valuation would place them on a PE of (which should not be used to often as a measure of valuing a share) around 14.5, which is not that high, as we mentioned earlier. At this valuation we feel the JSE might be worth more, as our valuation model is extremely conservative. We therefore see the JSE as a buy at its current price level.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.