Sale of carbon business exposes NZX to currency risk

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Analysts have upped their valuations for stock exchange operator NZX as it finalises a lucrative sale of its TZ1 carbon credit registry but warn that the deal will expose NZX’s balance sheet to a higher risk of currency fluctuation.

NZX is set to receive US$35.6 million worth of shares in private UK financial services company Markit in exchange for TZ1 Registry.

Credit Suisse analyst Greg Main points out that this will see a large proportion of the NZX balance sheet held in US dollars, as it cannot sell the Markit shares until the end of 2011.

NZX will also share in cash profits from the registry business over the next three years.

But Mr Main says the currency exposure, as well as uncertainty over the final value of the deal when the price is adjusted for future TZ1 earnings, means that any potential gain for NZX shares is likely to be less than if it had been a straight cash sale.

Nonetheless, Credit Suisse has raised its valuation and 12-month target price for NZX stock from $6.77 to $7.87, in its latest research report titled ‘Carbon to Diamonds.’

Although the exchange operator is facing a downturn in its core trading business, its diversified model and a strong balance sheet should help it perform relatively well, Mr Main says.

Forsyth Barr also added a dollar onto its valuation of NZX, taking it to $10.47 as a result of the deal. It also discounted the face value of the offer given that Markit is an unlisted, private company with no publicly available financial information yet.

Forsyth Barr analyst Guy Hallwright says the potential TZ1 trading division that NZX will retain is unlikely to be a significant business. It could well be overtaken by Australian competitors depending on when an emissions trading scheme opens up, he says.