Share to watch: Is it worth it for investors to have another look at JSE shares?

This is a precursor of the expected results, to be released next week on Monday. In December the JSE released a trading statement indicating that headline earnings per share were expected to be between 20 and 26percent lower for the 12 months to December 31. This decline is attributed to a reduction in trading, and the impact of their new tiered billing model for equities trading.

They increased investment in technology, particularly relating to the Integrated Trading and Clearing system. Once-off expenditures incurred during the period refer to the JSE’s executive leadership transition and the proposed acquisition of Link Market Services.

The JSE generates 47percent of revenues from services classified as capital markets; this includes equity market fees (almost 50percent of total capital market earnings), primary market fees, and commodity derivative fees, to name a few. Post-trade services constitute around 38percent of revenue, and this comprises BDA revenue and, clearing and settlement fees. These two sources of income are reliant on the volume and value of trades in the various markets.

The group will be upgrading Millennium in 2020, which will provide enhanced functionality for clients. Further, there are plans to advance non-cash collateral functionality, which is estimated to save clearing members and their clients approximately R1.2billion a year in cash handling, therefore freeing up capital to enable further trade activity.

The group is trading at a healthy dividend yield of 5.6percent, which is expected to rise to 6.4percent by the end of 2021. The total value of trades in the equity market was down 63percent from October to December, the total volume of trades was down 58percent, and the number of trades declined 61percent. These are significantly more substantial declines than what was seen over the same period in 2018, where the reductions were 31percent for value, 4percent for volume and 30percent for the number of trades.

Earnings expectation for the full year to December 31, 2019 and 2020 have declined by 31percent to 835cent per share and 905c per share, respectively. This pessimistic earnings assumption doesn’t incorporate the possibility of a potential recovery in trading conditions. Despite the additional competition from new entrants, it is possible that the current earnings weakness is cyclical and the share continues to offer decent value at current levels.

The JSE was one of the worst performers in our market over the last year, losing more than 30percent of its value. It is now trading on a forward earnings multiple of around 12 times, compared with its historical average of close to 14 times. Cost-saving initiatives should support earnings while trading volumes remain depressed. These initiatives are mainly focussed on reducing the variable and fixed cost base, which should better support performance during periods of low trading volumes.

The JSE offers an attractive forward dividend yield of 5.7percent. While the dividend growth has come under pressure in the weak economic environment, it can be sustained given its strong cash generative ability and balance sheet. The JSE boasted sequential dividend growth over the past five years at a compound annual growth rate of 13.4percent.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. JSE shares are held on behalf of clients.

BUSINESS REPORT