EUR 850.00 For Business Accounts Only

Morningstar | Japan Exchange Group Delivers Special Dividend to Shareholders at 4Q Result

With the exception of a special dividend of JPY 15 per share for achieving the profit target under its second medium-term management plan and to commemorate the formation of Tokyo and Osaka stock exchanges, there were no surprises in Japan Exchange Group, or JPX’s, fourth-quarter result. Final dividend of JPY 28 per share takes the full-year ordinary dividend to JPY 55 per share, slightly below last year and in line with the exchange’s 60% payout ratio. The lower dividend was attributable to a 3% decline in full-year profit to JPY 49 billion, which was also in line with our JPY 48.9 billion forecast. The weaker net profit was attributable to softer transaction volume and higher operating expense. We reiterate transaction volume is market-dependent and the focus should be on an exchange’s strategy. The latter was highlighted in its third management plan announced last month. Key to the plan was further investments on new trading platforms and improvement in system infrastructure. The exchange’s investments have been consistent and the higher operating expense this fiscal year was also reflective of this, in our view.

Financially, the exchange continues to target return on equity of 10% in any market condition. We continue to forecast average return on equity of 16% over the next five years. The high return forecast and more importantly, our expectation that the exchange can maintain excess economic profit over a 20-year period, underpins our wide moat rating for the exchange. The merger of Tokyo Commodity Exchange, or TOCOM will reinforce the exchange’s competitive advantage. We continue to see the basic agreement to acquire TOCOM as a strategic positive. Please refer to our March 28 note for further details. Our fair value of JPY 1,940 is unchanged. While the exchange is trading on a 7% discount to our fair value, we require a larger margin of safety and our 3-star rating is unchanged.