JSE upbeat over result of cost-cutting
The JSE’s turnaround plan seems to be working.
The bourse’s holding company — JSE Ltd, which cut 60 jobs in a scramble to reduce costs — said in a trading update on Tuesday that its 2018 half-year earnings were expected to be a vast improvement on the same period in 2017.
Last year was disastrous for the exchange, which, like many South African companies, was battered by lacklustre economic growth and political uncertainty. The JSE felt the pinch through reduced trading revenue, as jittery investors reluctant to take big bets on companies’ fortunes knocked total value traded on the JSE by 13% year on year in the first six months of 2017.
The JSE has furthermore had to contend with the first challenge to its monopoly in 60 years with the launch of four new stock exchanges in SA over the past 18 months.
The most threatening of these, A2X Markets, is providing a secondary trading venue for JSE-listed stocks at reduced trading costs. While A2X and its peers have yet to gain traction, the JSE has responded to the competition by announcing a new billing model, effective at the end of July, which will lower trading costs.
The JSE further responded to the changing competitive and economic environment by retrenching 14% of its workforce in 2017 to save R100m in the 2018 financial year. The bourse also cut spend on technology, removed vacancies and reduced discretionary spend.
Cost cuts and increased revenue were the major reasons for profit growth in the first six months of 2018, said Harry Botha, an analyst at Avior Capital Markets. Value traded in the JSE’s cash equities market, its mainstay, was up 13% year on year in the first half, Botha said.
But David Shapiro, deputy chairman at Sasfin Securities, continues to lament thin trading volumes on the JSE. The total value of all shares bought and sold on Monday was just R13bn, well below an average of R20bn, Shapiro said. Most of this trade took place in the last 10 minutes of the trading day as brokers closed out positions.
The JSE has listed 10 companies in 2018. Among them are Old Mutual Ltd and Quilter, Old Mutual’s former wealth unit, which listed following the group’s four-way split. Other companies include alcoholic beverages producer Distell, UK minerals exploration company Kore Potash and UK-headquartered Vivo Energy.
The JSE said on Tuesday that it expected headline earnings per share for the six months to June to be 30%-40% better than the same period in 2017.
The company’s share price rallied on the news to close 4.48% higher at R169 — still some way off its 12-month high of R204 reached on February 27, but adding to its 29% gain over the past year.
The improvement is welcome, considering that half-year earnings in 2017 slid 20% on thin trading volumes, volatility and declining investor sentiment. Operating profit fell 9.3% over the 12 months to December 2017 for the same reasons.
The expected increase in headline earnings per share to 638.2c-687.3c was largely due to "cost control, a once-off taxation credit of R31m as well as growth in revenue", the bourse said.
The tax credit related to an investment the JSE had made about five or six years ago to update its legacy broker dealer accounting system. In the end the system had not been replaced, Botha said.
He was forecasting 20% earnings growth for the full year on stronger revenue.
The consensus target price for the JSE Ltd’s share among analysts surveyed by Bloomberg is R192.50 — 13.9% ahead of its current level.
The JSE will release interim results on August 2.