Japan Exchange Group Posts Weaker Fiscal Q1 on Lower Equity Fees; FVE Reduced

We lower our fair value estimate for Japan Exchange Group by 3% to JPY 2,240 after a weaker-than-expected first-quarter result. The wide-moat-rated exchange’s share price rallied 18% off its year-to-date low in May and we would wait for a better risk buffer before buying the shares. First- quarter fiscal 2022 net income fell 1.6% year over year to JPY 12.1 billion, mainly due to a 13% year-on-year increase in operating expense. The increase was due to higher level of investment, in line with its fourth medium-term management plan announced earlier this year. Increased maintenance and operational expense and depreciation and amortization from the launch of the JGB clearing system also contributed to higher costs in the first quarter. Operating expense guidance increased by 7.6% to JPY 68 billion. While this is slightly ahead of our current forecast of JPY 66 billion, we believe there is some flexibility for the exchange to defer nonessential projects if trading volume is lower than anticipated as the year progresses.