TMX gets price upgrade on ‘unusually steep discount’ to peers

Analysts at Scotiabank note that TMX's stock trades at a 24% discount to its peers.

TMX Group Ltd. is in the midst of a “significant evolution,” even while the stock trades in a steep discount to the peers, says a Scotiabank analyst.

The Toronto-based operator of stock markets is currently conducting a review of its assets to outline a more concrete strategy to grow and diversify its revenue sources, which include the Toronto Stock market and the TSX Venture Exchange.

Phil Hardie, analyst at Scotiabank, said the review looks promising, and upgraded his price target around the stock to $56 from $51. TMX shares were trading at $52.62 as of mid-Wednesday afternoon.

\”We think TMX is in the early stages of the potential significant evolution because it re-positions itself from effectively becoming an infrastructure company into an applied technology company focused on customer and market solutions,” Mr. Hardie said.

The analyst also noted the stock offers a lot of value for investors, trading at a roughly 24% discount to the peers. He suggested the discount was a little too steep, given the attractive fundamentals that TMX offers.

“Strong free income, diverse revenue sources along with a high degree of operating leverage should position TMX stock as an attractive play on a capital markets recovery,” he explained.

The discount, however, has occurred as trading revenues for TMX have been impacted by market volatility, particularly sharp declines in the energy sector.

Mr. Hardie notes that TMX has taken steps to tackle that issue by diversifying its revenue sources. He explained the company could also potentially wade into new areas to increase growth, including “risk management, trading and issuer services and knowledge services.”

Still, the analyst was hesitant to give the stock the entire thumbs. He rates it as a sector perform, despite the discount, noting trading revenue concerns and competition still pose risks towards the stock.

“Although we feel lots of risk is priced in with TMX trading at what seems to be an unusually steep discount to its peers, an uncertain outlook keeps us quietly lines,” Mr. Hardie said.

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