Not quite more of the same from the JSE

For each of the three years from 2013 to 2015 the JSE performed strongly enough to declare a special dividend. Its latest results, however, show that while the year ended December 31 2016 still delivered growth, it did not quite achieve the same heights.

While operating revenue for the exchange was 10% higher at R2.3 billion, group earnings before interest and tax (Ebit) dropped 5% to R975 million. The JSE noted that this was a result of price reductions, forex movements that negatively impacted assets denominated in hard currency, and an increase in costs.

Due to higher finance income and a greater contribution from Strate, the JSE did however post a 2% growth in profit after tax, which rose to R920 million.

“It’s not nearly more of the same, but we are actually quite pleased with the results if you look at the fact that operating revenue is up 10%, which is not too dissimilar to previous years,” the JSE’s CEO Nicky Newton-King told Moneyweb. “The reason that earnings after tax is only up by 2% is a direct consequence of our very heavy technology investments.”

She added that 2015 had been an exceptionally good year, which meant that the base for the 2016 results was very high.

“You have to look at both sides of the income statement,” Newton-King said. “When revenue is up so much but costs are up a little bit more, then you get the Ebit numbers that you do.”

The JSE grew headline earnings per share by 4% to 1 063.2 cents per share. It also announced an increase in its ordinary dividend of 8%, up to 560 cents per share from 520 cents per share last year. This puts the counter on a dividend yield of around 3.4%.

Newton-King noted that while increased operating costs had weighed on performance, the exchange is nearing the end of its major investment into the replacement of its trading and clearing technology for derivatives. The JSE’s technology costs were 20% higher year-on-year, at R283 million. This accounts for 33.5% of operating expenditure other than personnel costs.

For shareholders, an important question is how much of that is once off costs, and how much is ongoing.

“There is quite a lot of business-as-usual spend in there,” Newton-King acknowledged. “But we are looking at how you reduce that over time by taking advantage of newer and more modern technologies.”

2017 also poses new challenges for the JSE with the introduction of competitors into the market. This will put further downward pressure on pricing, but Newton-King said that the company will be concentrating on its own business.

“We are focusing on making sure that our business is as compelling to our clients as it can be,” she said. “Part of that is about the technology we use, hence the replacement of our derivatives market technology, and part of that is regulatory schema that we use and making sure that that enables our clients to do what they want to do. We’re very proud of the regulatory reputation that we have for being a constructive, but world-class regulator.”

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