[South Africa] JSE delivers strong cash generation despite tough market conditions
The Johannesburg Stock Exchange (JSE) faced a constrained operating environment in 2019, with muted activity in the local capital markets and an increase in planned operating expenditures, which have compressed total headline earnings by - 23%. Despite these challenging capital market conditions, the Group remains strongly cash generative, driven by cost efficiencies and good capital expenditure discipline.
The Group maintains a healthy capital structure with a strong cash position at year-end of R2.6 billion and no debt. Cash generated from operations in 2019 was R880 million (2018: R913 million). This has enabled the JSE to grow the ordinary dividend by 5% to 690 cents per share (2018: 655 cents per share) in line with our progressive dividend policy, and to declare a special dividend of 150 cents per share (2018: 185 cents per share).
The Group has therefore maintained the total dividend pay-out at R730 million (2018: 730 million). This is reflected in the total dividend yield of 7.1% which is ahead of the average dividend yield in South Africa (3.4%) and emerging markets (2.9%).
The decline in earnings is largely attributable to a planned rise in costs off an abnormally low base (the amortisation of new trading and clearing system costs; headcount adjustments to plan levels and to establish a platform for growth; as well as one-off costs relating to the leadership transition).
The diversification of the JSE's revenue streams ensured that the decline in revenue was limited to 1%, at R2.19 billion (2018: R2.20 billion) given the mixed performance across asset classes and despite the muted activity in the primary and secondary equity markets.
As part of a broader drive to focus on our clients, the exchange reduced equity trading fees for clients by 12% (a pro-rated impact of R31 million) following the introduction of the tiered billing model in August 2018. Together, the responsive pricing and deep liquidity pools at the JSE has ensured that the Group retained 99.32% market share.
"Our economy faces deep structural challenges, and we are facing head winds, the impact of which we see reflected in our bottom line. This difficult operating environment demands an innovative response from us, and provides an opportunity to partner with our market participants to co-create solutions for inclusive and sustainable growth," says Leila Fourie, Group CEO of the JSE.
The performance of the JSE's various markets and segments was as follows:
Primary markets (listings)
The JSE, along with other global markets, has seen a shift in flows from equity to the bond markets. At the JSE, the number of bond market listings increased from 539 to 710 while equity market listings reduced from 12 to 5 IPOs. Most equity listings resulted from corporate actions. The decline in equity market IPOs was moderated by an increase in listed bonds, new warrants and structured products, all of which delivered double digit growth.
Primary markets revenue decreased by 5% to R147 million (2018: R155 million) due to a decline in equity market IPOs. The IPO decline followed global trends: equity market IPOs worldwide decreased by 19% in 2019. Although the number of listed entities declined, market capitalisation of all entities listed on the JSE increased by 38% during 2019.
Secondary markets (trading)
Equity Market: While equity value traded increased by 2%, JSE revenue decreased by 13% to R433 million (2018: R499 million), largely on the back of a reduction in pricing. Colocation activity contributed 42% (2018: 37%) of overall value traded.
Equity Derivatives Market: Revenue was flat at R143 million (2018: R143 million), however, value traded increased for the first time in 3 years by 2%. Activity remained muted, but hedge activity moderately increased in H2, as did the level of the index, which supported higher value traded.
Bond and Interest Rate Market: Revenue increased by 21% to R68 million (2018: R56 million) as nominal bond value grew by 16% as a result of global uncertainty and foreign sales of emerging market assets, as well as an increase in activity in the repo market. Geopolitical factors had a material impact on the global yield outlook and has resulted in increased volatility and volumes. The JSE has, however, seen a decrease in the trading of interest rate derivative contracts, which were down 6% year-on-year. Revenue from the bond electronic trading platform (ETP) contributed R7 million.
Currency Derivatives Market: Revenue declined by 2% to R47 million (2018: R48 million). Long-term global risk events contributed to uncertainty in the market, which resulted in increased hedging and reduced speculation, with an increase of 7% in open interest. The number of contracts traded declined by 7%.
Commodity Derivatives Market: Revenue increased by 5% to R82 million (2018: R78 million) due to volatility in the local grains market created by weather uncertainty, as well as heightened activity in international grains products. There was also noticeable speculative activity in local grain contracts.
Company Services: Revenue increased by 16% to R11.9 million (2018: R10.3 million), owing to growth across all services offered.
BDA revenue increased by 10% to R333 million (2018: R303 million) following a 10% increase in the number of transactions reflecting the increase in activity and smaller transaction sizes. Clearing and settlement revenue decreased by 5% to R385 million (2018: R404 million) owing to the lower billable value traded in the Equity Market.
Revenue increased by 16% to R310 million (2018: R267 million). Market data is a key growth node for the exchange.
"We are well positioned to execute on the JSE's 2020 strategy to deliver sustainable growth, operate trusted markets and drive inorganic growth while maintaining disciplined cost control as we stay competitive and retain market share," concludes Group CEO, Leila Fourie.