Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. File Image:IOL
CAPE TOWN - The 12-month share price graph of the JSE Limited is to cry for, down 32 percent, making it one of the worst-performing stocks on the JSE. 

It is not only the prospect of lower earnings, but also low trading volumes emanating from subdued investor risk appetite.

There is an absence of interest in South African stocks.

The JSE released a trading statement on December 20, 2019, where it noted that headline earnings per share would be down between 20 and 26percent for the year to December 31.

They have experienced subdued market and trading activity. The total value of trades in the equity market was down 63percent from October to December, the total volume of transactions 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 declines were 31percent for value, 4percent for volume and 30percent for the number of trades.

Revenues of the group are variable and primarily driven by activity on the various markets they operate.

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.

The JSE 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 per annum in cash handling, therefore freeing up capital to enable further trade activity.

The JSE is trading at a healthy dividend yield of 5.6percent, which is expected to rise to 6.4percent by the end of 2021.

Earnings expectation for the year to December 31, 2019, and for 2020, have declined by 31percent to 835cents per share, and 905c per share respectively during 2019.

The pessimistic earnings assumption doesn’t incorporate the possibility of a potential recovery in trading conditions. Despite the additional competition from new entrants, the feeling is that the current earnings weakness is cyclical and that the JSE continues to offer attractive value at current levels.

The JSE is now trading on a forward earnings multiple of 12.9 times compared with its historical average of 13.9times. Additionally, margins currently seem low compared with international peers.

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 is estimated that 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 rate of over 13percent. Consequently, if you are interested in dividends, this is a share to consider.

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.

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