Tel Aviv Stock Exchange Q423 Update ($TASE)
Wide Moat Business with potential for margin expansion from 40% EBITDA margins to low 50% over the medium term
Steve Wynn once said: "The only way to win in a casino is to own one."
To a lesser extent but along the same lines, the same could be said for a stock exchange: The best way to win in the stock market is to own one. Hence, the investment thesis behind owing the common equity in the Tel Aviv Stock Exchange, Israel’s only stock exchange:
The Tel Aviv Stock Exchange ($TASE) reported Q423 earnings on March 5th, 2024. The stock has had a nice run despite the challenging situation in Israel:
The Valuation of $TASE, relative to the quality of the asset and the growth potential, is still not demanding, especially in comparison to other exchanges worldwide:
So, what’s the investment thesis going forward?
Some context is important: It’s somewhat surprising given Israel’s economic and political prominence in the Global Economy, but its stock exchange has only been public since 2017. Previously, it was a quasi-government entity owned by a confederation of banks. Translation: Substantial underinvestment in technology and lack of pricing discipline relative to other exchanges (TASE charges less than half of what some of its peers charge for equities and fixed income)
Bottom line: There’s plenty of low-hanging fruit to drive margins from current levels, which is a powerful force for value creation when you have a high-quality business trading at a decent valuation.
Here’s a sampling of some of the major initiatives for growing the top and bottom lines that were highlighted from the last conference call:
Fixed Income
The reform in the bond market is making headway – TASE has reduced the minimum order size for government bonds, corporate bonds and T-bills, further to the reduction of the minimum order size for equities in the previous year. The minimum order size for COCO bonds has also been reduced, increasing average daily trading volume threefold compared to the 90 days prior to the change.
Derivatives:
In the derivatives market, TASE launched an additional weekly series of options on the TA-35 index that expires on Tuesdays, in addition to the Thursday expiration series, which has significantly boosted the opening auction of shares on the expiration days.
Data
In 2023, TASE launched a digital system for real-time reporting of OTC transactions, giving investors access to readily available information on transactions executed off the order book. In addition, TASE’s proprietary dedicated private market system, which is used, among other purposes, for the operation and clearing of mutual hedge funds, has been activated and most TASE members have already subscribed to it. To date, 22 mutual hedge funds with AUM of NIS 210 million have already registered with the Clearing House.
Conclusion:
The political and economic situation in Israel is uncertain in the short and medium term, but in the longer term, TASE should be able to return to its long-term target of 10-12% organic topline growth. In the meantime, TASE is aggressively returning capital through dividends and buybacks, and you get to own one of the highest quality and most durable businesses known to man. Murray Stahl from Horizon Kinetics recently made this point about stock exchanges:
For a single asset, like gold or oil, a royalty is the quintessence of asymmetrically positive economic exposure.
For a diverse array of physical assets and financial assets and activities, it is a securities exchange that gives the most asymmetrically positive exposure. Exchanges participate in almost every economic activity that becomes sufficiently large to operate on a national and global scale. They get to participate because business activity on that scale requires the ability to hedge and transact on a wholesale, transparent, and secure basis that only a centralized and regulated marketplace offers.
It is for this reason—as the croupiers for global financial transactions and risk control activity—that exchanges provide unparalleled participation in the overall expansion of trading activity, monetary inflation and even technological innovation. Technology? A new technology that wins the lottery-ticket odds necessary to reach critical economic mass will almost necessarily find its way into exchange activity.
Like a royalty company, a securities exchange is a form of croupier, always taking a share of the action without the heavy capital investment, operating risk or financial leverage that its customers take on. The exchange’s value is in providing the venue and the associated data services. Which is why their profitability is exceeded only by royalty companies. The difference between the two is simply that exchanges have a higher staffing requirement: for maintaining their computer trade matching and information platforms, and for financial oversight and reporting, which includes constant interaction with regulatory agencies.