New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>NZX</h2>
<p><strong>The Wise Man Built His House Upon The Rock...</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>We initiate coverage of NZX with an OUTPERFORM rating and a target price of NZ$1.57. We believe NZX presents an excellent buying opportunity for the long term investor, exhibiting both defensive qualities and an attractive growth profile. Our positive view is principally based on fundamental value, diversity of turnover and growth opportunities in niche markets. The business is also well placed to benefit from a global thematic shift towards sustainable financing; both from an investment point of view and as a driver of a number of revenue streams. A new management team was appointed in 2017, and set a range of aspirational five year targets for FY23, with short term objectives largely executed to date. Due to a restructuring of the business in 2018, exposure to a number of structural growth trends and product superiority in the Wealth Technologies business, we are sanguine that longer term ambitions can be met. Key risks include concentration risk in the Wealth Technologies business and increased competition in New Zealand's ETF market. We expect NZX's share price to be supported in the near term by its defensive yield of ~5%, a healthy balance sheet and stable underlying earnings growth.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/133/126/original/image_56519074831589328199604.png?1589328202" class="editor-image img-responsive" data-smartkarma-image-id="133126"></figure>
<p><strong>Initiatives executed in core businesses</strong></p>
<div id="m_7704806115015548896it3j6-2">
<p>The core divisions have an attractive growth outlook, unpinned by removal of growth limitations. These include the simplification of listing rules in the Issuer Relationships division so to drive new product lines, fee structure changes in Secondary Markets to increase total value traded and cleared and the divestment of non-performing assets in the Data and Insights division.&nbsp;</p>
</div>
<p><strong>Funds businesses driven by Wealth Technologies product superiority and structural&nbsp;ETF tailwind</strong></p>
<div id="m_7704806115015548896it3gf-2">
<ul>
<li>NZX is the sole provider of&nbsp;ETFs&nbsp;in New Zealand. With a low global penetration rate, Smartshares is well placed to benefit from the structural migration towards passive funds and the translation&nbsp;into further net cash inflows in addition to further market growth.</li>
<li>It is difficult for investors to have a high level of insight into the Wealth Technologies business.&nbsp;However&nbsp;API-enableme<wbr>nt&nbsp;and a high level of versatility&nbsp;provide a point of difference for NZXWT&nbsp;in&nbsp;a stagnant&nbsp;market encumbered by legacy technology. We are hopeful of new contract wins in the&nbsp;present window of opportunity, with&nbsp;competitors looking to overcome a range of existing limitations.&nbsp;</li>
</ul>
</div>
<p><strong>Largely immune to the impacts of&nbsp;COVID-19</strong></p>
<div id="m_7704806115015548896itcls-2">
<p>Deemed an essential service&nbsp;during Level 4&nbsp;lockdown, we do not see genuine distress in a further downside scenario, with 64% of the business stable or likely&nbsp;to experience a positive uplift. The remaining&nbsp;36% of FY19 revenue will experience some short term softening&nbsp;of growth due to the cyclical nature of the Issuer Relationships and Funds Management businesses.&nbsp;</p>
</div>
<p><strong>Valuation&nbsp;</strong></p>
<div id="m_7704806115015548896i1qlx-2">
<p>We expect the business to grow revenue and EBITDA at an attractive rate and use a discounted cash flow to set a target price of NZ$1.57. &nbsp;With a pipeline of opportunities in the Wealth Technologies business, further contract wins are a likely catalyst for the stock.</p>
</div>
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<div><strong>Jamie Foulkes</strong></div>
<div><a href="mailto:jamie.foulkes@forsythbarr.co.nz" target="_blank" rel="noopener">jamie.foulkes@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 491 2217</div>
</div>
</div>
</div>


NZX
The Wise Man Built His House Upon The Rock...
OUTPERFORM
We initiate coverage of NZX with an OUTPERFORM rating and a target price of NZ$1.57. We believe NZX presents an excellent buying opportunity for the long term investor, exhibiting both defensive qualities and an attractive growth profile. Our positive view is principally based on fundamental value, diversity of turnover and growth opportunities in niche markets. The business is also well placed to benefit from a global thematic shift towards sustainable financing; both from an investment point of view and as a driver of a number of revenue streams. A new management team was appointed in 2017, and set a range of aspirational five year targets for FY23, with short term objectives largely executed to date. Due to a restructuring of the business in 2018, exposure to a number of structural growth trends and product superiority in the Wealth Technologies business, we are sanguine that longer term ambitions can be met. Key risks include concentration risk in the Wealth Technologies business and increased competition in New Zealand's ETF market. We expect NZX's share price to be supported in the near term by its defensive yield of ~5%, a healthy balance sheet and stable underlying earnings growth.&nbsp;

Initiatives executed in core businesses

The core divisions have an attractive growth outlook, unpinned by removal of growth limitations. These include the simplification of listing rules in the Issuer Relationships division so to drive new product lines, fee structure changes in Secondary Markets to increase total value traded and cleared and the divestment of non-performing assets in the Data and Insights division.&nbsp;

Funds businesses driven by Wealth Technologies product superiority and structural&nbsp;ETF tailwind


NZX is the sole provider of&nbsp;ETFs&nbsp;in New Zealand. With a low global penetration rate, Smartshares is well placed to benefit from the structural migration towards passive funds and the translation&nbsp;into further net cash inflows in addition to further market growth.
It is difficult for investors to have a high level of insight into the Wealth Technologies business.&nbsp;However&nbsp;API-enablement&nbsp;and a high level of versatility&nbsp;provide a point of difference for NZXWT&nbsp;in&nbsp;a stagnant&nbsp;market encumbered by legacy technology. We are hopeful of new contract wins in the&nbsp;present window of opportunity, with&nbsp;competitors looking to overcome a range of existing limitations.&nbsp;


Largely immune to the impacts of&nbsp;COVID-19

Deemed an essential service&nbsp;during Level 4&nbsp;lockdown, we do not see genuine distress in a further downside scenario, with 64% of the business stable or likely&nbsp;to experience a positive uplift. The remaining&nbsp;36% of FY19 revenue will experience some short term softening&nbsp;of growth due to the cyclical nature of the Issuer Relationships and Funds Management businesses.&nbsp;

Valuation&nbsp;

We expect the business to grow revenue and EBITDA at an attractive rate and use a discounted cash flow to set a target price of NZ$1.57. &nbsp;With a pipeline of opportunities in the Wealth Technologies business, further contract wins are a likely catalyst for the stock.




Jamie Foulkes
jamie.foulkes@forsythbarr.co.nz
+64 4 491 2217





NZX: The Wise Man Built His House Upon The Rock...