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UPDATE 2-Toronto Stock Exchange owner's profit up on trading uptick

Alastair Sharp
Wednesday, 5 Feb 2014 | 10:15 AM ET

TORONTO, Feb 5 (Reuters) - TMX Group Ltd, the owner of Canada's main stock exchange, on Wednesday reported a fourth-quarter profit well above analysts' estimates as trading activity showed early signs of recovery.

TMX, which owns the Toronto Stock Exchange, has struggled to offset the cyclical swing away from commodities as resource companies play a major role in issuance in Canada.

The company said it had benefited from lower financing costs after restructuring its long-term debt and that the rising U.S. dollar had boosted revenue from greenback-denominated accounts.

A group of Canadian financial institutions bought TMX in September 2012 and combined it with the smaller Alpha stock exchange and the trading clearinghouse Canadian Depository for Securities Ltd.

Analysts praised the results, the first to offer comparable year-earlier figures after the deals closed, but expressed caution about the challenging state of Canadian capital markets.

"Robust free cash flow and a high degree of operating leverage likely position TMX as an attractive play on a capital markets recovery," Scotiabank analyst Phil Hardie wrote in a note, adding that the trading environment would likely remain tough.

Net profit attributable to TMX's equity holders rose 27 percent to C$41.4 million ($37.4 million), or 77 Canadian cents per share, from C$32.6 million, or 61 Canadian cents per share, a year earlier.

Excluding acquisition and integration costs, TMX earned 96 Canadian cents per share. Analysts on average had expected 85 Canadian cents, according to Thomson Reuters I/B/E/S.

Revenue slipped to C$180.7 million from C$181.1 million but beat analysts' estimates of C$174 million.

TMX said it expected declines of about C$17.9 million in revenue and C$9.9 million in operating income this year after losing the contract to administer SEDAR, Canada's equivalent of the U.S. Securities and Exchange Commission's EDGAR, and other filing systems.

Securities regulators replaced TMX with CGI Group, which itself recently lost a contract to manage the registration system for the new U.S. healthcare program initiated by President Barack Obama.

STILL CHALLENGING

TMX reported lower revenue from listing fees, highlighting the fragile state of the market for exchange services. Fewer companies joined the TMX's various exchanges, and existing listers paid less based on their own declining market capitalization.

Along with the TSX, the company also owns the Montreal derivatives exchange and the small-cap TSX Venture Exchange, where listings are heavily weighted toward the resource sector.

Shares of TMX were up 1 percent at C$50.38 in early trading on the Toronto Stock Exchange. At Tuesday's close, the stock had fallen 7 percent over the past year, compared with a 12 percent rise in the broader S&P/TSX financial index.

"The shares are fully valued and ... the capital markets environment remains challenging," RBC Capital Markets analyst Geoffrey Kwan wrote in a note.

TMX is bracing for the arrival of Aequitas Innovations Inc, an upstart competitor seeking to win over institutional investors with an aggressive stance against high-frequency trading.

Asked on a conference call if TMX would consider a similar offering, executives did not give details of their plans. They said, however, that high-frequency trading accounted for 15 percent to 20 percent of all TMX trades and had narrowed spreads and added liquidity.

Aequitas is backed by Royal Bank of Canada, Barclays Plc, pension fund OMERS Capital Markets, mutual fund managers CI Financial Corp and IGM Financial Inc , telecom company BCE Inc and others.

TMX is controlled by a consortium of Canadian banks and other financial institutions that thwarted a takeover bid by London Stock Exchange Group.

RBC, Canada's biggest lender, was one of the nation's few banks not involved in the consortium, as it had advised the London Stock Exchange on its bid.