Japan Exchange Group Earnings: Rising Stock Markets Drive 47% Increase in Net Income

We increase our fair value estimate for wide-moat-rated Japan Exchange Group by 3% to JPY 2,300 per share from JPY 2,230 following a stronger-than-expected first-quarter result. Rising stock markets in Japan helped boost the exchange’s net income by 47% on the previous corresponding period. Our fair value increase is driven by an upgrade to our near-term estimated revenue from higher trading activity, partially offset by higher operating expenses. The exchange’s limited increase in operating expenses compared with its increase in trading revenue, we believe, reflects the inherent operating leverage and positive volatility exposure within exchange businesses like Japan Exchange Group, as increased volumes and values require small incremental costs. Nevertheless, at current prices, the exchange’s shares screen as slightly overvalued.