OTC Markets Group

OTCM provides regulated marketplaces offering a cost-effective solution for targeting U.S. investors. Issuers wanting an informed and efficient U.S. market face less regulatory complexity and so incur lower costs. Its advanced electronic network model is low cost to traders by eliminating the middle man. This model, combined with high-quality, advanced- technology service has seen strong growth especially from international issuers. Despite challenging market conditions, it has grown revenue, much of which is non-market sensitive, every year since 2007.

Marketplaces Platform
OTCM is not an exchange, it is a technological network providing an “Open, Transparent and Connected” market saving issuers compliance costs and traders dealing costs. Issuers range from U.S. SMEs to global names such as Roche. OTCM offers three tiers of marketplace, with its highest-tier companies having exchange-comparable standards. OTCM generates revenue from: (i) OTC LINK ATS trading services (33% of 2012 revenue), mainly from charging brokers fixed monthly subscriptions with some variable month user and usage fees; (ii) market data licensing (39% of 2012 revenue), mainly from monthly fees from distributors such as Bloomberg; and (iii) issuer services (28% of 2012 revenue), mainly from annual information and communication services contracts to issuing corporates.

Why Issuers Use OTCM
OTCM’s marketplaces provide issuers with simple, technologically-advanced, regulated marketplaces, well connected to the investor and press communities, at a low cost. For broker-dealers, the SEC registered ATS trading systems are exchange equivalent in service but have lower intermediary costs.

The Key Sensitivities
The key sensitivities are regulation and technological development. Both present OTCM with challenges and opportunities. Current proposals to ease some of the rules for small U.S. companies could see greater demand to have their securities traded. There are market volume related revenues, but these are quite modest.

Valuation: Not Paying Full Value For Growth
OTCM is very profitable (c 40% ROE), has strong forecast growth (c 16% CAGR 2012-14) and generates cash (over $4m+ pa), and yet it trades on a 2013 P/E of just 14x. We believe this is partially due to low stock liquidity. Our conservative valuation approaches indicate a fair value of around $10.7.