At the end of June, we attended TMX Group’s Capital Markets Day in Toronto where we met the CEO, CFO and other members of the senior management team. TMX is a Canadian financial services company that operates exchanges for trading equities, fixed income, derivatives and energy markets.
Our investment in TMX has delivered nearly 40% total return since we initiated our position in the summer of 2023, significantly outperforming the index over this period[1]. It is a top ten positive contributor this year and currently a 4.2% weight in the SKAGEN Global portfolio.
Ambitious growth plans
TMX is methodically building a resilient franchise, both organically and inorganically – it acquired VettaFi, a US-based ETF business, earlier this year. At the Investor Day management gave a compelling presentation of the company’s strategy to drive further growth in revenues and profitability.
Their plans are ambitious, with a target to double the speed of revenue growth to reach CAD$2 billion by the end of the decade (it took 14 years to grow total revenues to CAD$1 billion between 2008 and 2022). Management also outlined how they plan to continue investing in growth initiatives across the group, including improvements in both product mix and geographical reach, while maintaining cost discipline to deliver positive operating leverage in upcoming years.
Our analysis shows that TMX can compound earnings per share annually at roughly 10% over the next decade, which we don’t believe is currently reflected in its share price. The company offers optionality in a number of areas with its crown jewel, the Global Solutions, Insights & Analytics division, expected to be the main growth engine of the franchise.
Despite growing from CAD$719 million market cap at IPO in 2002 to CAD$10 billion today, TMX remains relatively small among exchanges. We believe the stock remains significantly undervalued with over 60% potential upside over our 2–3-year investment horizon.
The Investor Day ended with our participation in the market close ceremony that ends the trading day at TMX.
Canadian Pacific: Connecting North America
Following our trip to Toronto, we met with the CEO of Canadian Pacific in Paris. We have recently added to our position in the Calgary-based railway company which is the largest position in the fund at 6.9% of assets.
The company’s integration with Kansas City Southern, which creates the first single-line rail network connecting Canada, the US and Mexico, is on track and synergies may be achieved earlier than anticipated. The CPKC combination stretches approximately 20,000 miles and employs 20,000 rail roaders.
It also provides large optionality with a plethora of opportunities to provide customers with improved supply chain solutions through partnerships with other shippers and freight companies (including other railways) or via the expansion of Canadian Pacific’s own railroad system, given that the company owns its own track infrastructure.
Canadian Pacific’s vision is to provide ‘truck-like service’ that enables the company to take a bite out of the huge truck transportation market, thus opening up another avenue for growth. As well as faster transit times, the plans offer an environmentally-friendly alternative to trucking – a single train keeps more than 300 vehicles off the roads which reduces emissions and improves road safety.
The CPKC Network connects six of the seven largest metro regions in North America
Billion-dollar synergies
Management said in our meeting that they are on track to exceed the targeted US$700 million in annualised revenue synergies from the CP-KCS merger this year. They also now expect an additional US$250 million in synergies from its automotive division in 2025, three years earlier than expected, with the potential for total synergies from the combination to exceed US$1 billion.
We also learned how capital intensity is expected to fall gradually in coming years as spending on infrastructure resiliency and capacity declines. This should be positive for both Free Cash Flow and Return on Invested Capital.
We believe Canadian Pacific will start buying back shares in early 2025 as debt falls towards the company target, which should be a positive development for the investment case. There is ample cash to be deployed in this area going forward and management has the right instinct to prioritise buybacks over dividends at this point when they company’s shares look substantially undervalued. They have gained around 4% this year and we estimate they potentially have more than 60% further upside over the next two to three years[2].
All info as at 30/06/2024 unless stated.
[1] CAD return
[2] As at 08/07/2024 in CAD