The International Stock Exchange is the topic of conversation when Hardman and Co’s Equity Analyst Jason Streets caught up with DirectorsTalk for an exclusive interview.
Q1: Perhaps we could start with you explaining what The International Stock Exchange (TISE) does and what makes it different?
A1: TISE is a stock exchange based in Guernsey in the Channel Islands. Unlike its better-known peers like the London Stock Exchange or Deutsche Borse, its principal business is not trading securities; it is primarily a technical exchange.
Clients come to TISE to list their securities because they need a listing to fulfil certain requirements and TISE offers them a very efficient, good value service. Its biggest business is in Eurobonds and it is the biggest market in Europe for listing high-yield bonds, for example.
It also has a pool of ‘domestic’ equities and a significant share of the market for listed UK Real Estate Investment Trusts (REITs), as well as hosting a comprehensive sustainable finance segment, TISE Sustainable. In total, it has over 4,000 securities listed with a value in excess of £650bn.
Q2: If it’s not primarily a trading venue, how does it make money?
A2: 98% to 99% of revenues come from listing fees; both on initial listing and the annual fees payable. In the half year to June 2023, just reported, 61% of revenues came from the annual listing fees. This is a highly sustainable form of income. The initial listing fees are obviously more volatile. In 2021, a boom year for new listings, the annual fees dropped to less than 50% while still growing handsomely themselves.
Q3: You mention the half-year results, how did they fare in this period?
A3: Very well. Revenue was up 7%, EBIT was up 8%, and fully diluted EPS was up 17% on the first half of 2022. Now 2022 was a down year, as it was for most people in financial markets but profits in the first half of 2023 were on a par with the record 2021 so this is a robust recovery. What it showed me was the power of those annual fees.
New listings (at 75) were down on the 487 in the first half of 2022 and 507 of 2021, but total listings still rose: they were 3,431 in June 2021, 3,815 in June 2022 and they finished at 4,140 in June 2023. Added to that, TISE raised the fees in October – the average annual listing fee was 4.8% higher year-on-year. The fees are still very competitive and relatively trivial in the scheme of things for the issuers.
Costs are largely fixed in this business, primarily staff. And by fixed, of course, we mean not dependent on revenue; staff costs obviously rose, as they have everywhere, but TISE managed to report a constant 43% EBIT margin.
Q4: It sounds like a good business, what do you see as the main threats or risks to its model?
A4: Despite the solidity of the annual fees, the new listing fees are important and these are dependent, in part, on market conditions and in particular in activity in the high-yield and securitisation markets. The company warned that it thought new listing activity wouldn’t pick up fully until next year and those expectations are baked into our forecasts. That’s in the immediate, short term.
In the more medium-term outlook, the biggest threat comes from potential regulatory change. In 2022, the UK government changed some of the rules to encourage UK fund structures to list onshore, these had little impact. In 2023, they tinkered with the regime again and it is too early to tell whether this will make any difference. But the fact remains that the changes do not make TISE any less attractive and the offshore route is a well-known, proven solution that is stable and easily understood.
Our initial concerns about this approach from the UK Treasury have been somewhat alleviated. And the treasury has made clear that the rules are always going to be very strict as they do not want to reduce the scope of taxation.
But possible rule changes will always remain a threat.
Q5: Is there anything TISE can do about it?
A5: Not directly, but what it is doing is looking to diversify revenue sources. That means looking for a wider geographical spread of business – currently just under 60% originates from the UK – and, to that end, it announced that it had signed up two new members in the first half, including its first from Bermuda and it is growing its presence in Ireland.
It has also just launched a new service: TISE Private Markets. This provides unlisted companies with a dedicated marketplace, which they can use for trading, settlement and registry management. Everyone’s heard of the decline in public listings – more companies going private or staying private – and this is an attempt to tap into that market. Its first client is a Channel Islands business, which operates garden centres across the Channel Islands and the UK. It has annual revenues of £350m and more than 4,000 employees. More pertinently, it has over 420 private shareholders, of whom three quarters are based in Guernsey.
Let me just quote its CFO, Richards Hemans, who sums up rather well, I think, what the Private Markets Initiative is all about.
“This service provides a fantastic solution for private companies, like Blue Diamond, whose shareholders want a better way to trade their shares but without the cost, regulatory burden, and loss of control that a public listing entails. We believe that using the bespoke auction trading model and wider functionality of TISE Private Markets will support liquidity, enhance price discovery and make share trading more transparent for sellers and buyers, and therefore ensure that the share price better reflects the company’s underlying fundamentals.”
Funnily enough, not long after TISE announced its new service, the LSE announced it was setting up something similar. We’ll see how it goes, we haven’t put anything in our forecasts for it, but it could grow into something quite significant.
Q6: What do you think about the valuation of TISE? I see it attracted a major new shareholder in April.
A6: Yes. In April, Miami International Holdings (MIH), which owns the MIAX Exchange Group, The Minneapolis Grain Exchange and The Bermuda Stock Exchange bought a smidgeon under 15% of the company, at a price of 1,525p. If it wishes to acquire any more, it will have to get prior consent from the Guernsey Financial Services Commission. MIH filed a confidential listing document with the SEC back in May 2022, but we haven’t heard anything more from them, either about them acquiring a listing or what their intentions are with The International Stock Exchange, we’ll just have to wait and see.
The European listed peers of TISE, although not directly comparable, trade on an average 17x December ‘24 PE and 11x EV/EBITDA. Applying similar multiples to TSIE would equate to a value of £22.50 on the EBITDA basis and £33 on the PE basis. The EBITDA multiple doesn’t give any value for Guernsey’s low tax regime.
On our DCF model, using our forecasts for this year and next, a 6% growth rate for the following two years and 2% thereafter produces a value of between £63m and £89m, with a midpoint of £74m (which is using a 12% discount rate), which equates to just less than £25 per share.
Q7: What is its current price?
A7: Well, as is only fit and proper, TISE is listed on TISE and the quoted price is 1,525p – 1,575p but liquidity is low. One of the reasons we publish research on the company is to help improve the liquidity of the shares by raising its profile and Miami International demonstrated it’s not impossible to get hold of a big stake if you try hard enough.
