Company Reports

We maintain our AUD 75 per share fair value estimate for wide-moat ASX following its full-year results. The exchange reported AUD 472 million in underlying profit, slightly below our expectations for AUD 477 million and down 17% on the prior year. The declining profitability was primarily the result of increased expense growth, as the exchange continues to invest heavily to retain its social and regulatory license to operate, following the botched replacement project for its Clearing House Electronic Subregister System, or Chess. Operating income grew 3% on the prior corresponding year, or pcp, as 12% growth in futures- and over-the-counter-clearing revenue, as well as 6% growth in technology and data revenue, helped offset a 13% decline in listings revenue. ASX shares continue to screen as undervalued, as we expect the current increase in expenditures to be temporary in nature.

We expect Australian Securities Exchange's near- and medium-term strategic focus to be on protecting its economic moat in cash equity clearing and settlement. ASX has long been protected from competition through various exclusive licences to clearing and settlement, which we consider a source of its economic moat, based on intangibles. However, over the past decade, ASX has faced increasing calls from the federal government, regulators, and industry bodies for more competition. In response to these calls, ASX attempted to deliver a world-leading new clearing system, based on blockchain. However, after several years of delays and cost overruns, this project has been shelved, which has renewed discussion on opening up the clearing and settlement market to more competition. ASX, we believe, will therefore focus on trying to demonstrate to the federal government, regulators, and industry bodies that it is capable of maintaining smooth operations of Australia’s financial infrastructure, including by increasing spending on its various systems. Regardless of the potential regulatory outcome, cash equity clearing and settlement make up only around 15% of ASX’s revenue. Moreover, we believe that even if cash equity clearing and settlement would be opened up to competition that ASX’s business would remain well protected due to network effects inherent in ASX’s clearing business. We therefore do not expect significant changes to ASX’s cash equity clearing and settlement market share or margins in the foreseeable future.

We expect Australian Securities Exchange's near- and medium-term strategic focus to be on protecting its economic moat in cash equity clearing and settlement. ASX has long been protected from competition through various exclusive licences to clearing and settlement, which we consider a source of its economic moat, based on intangibles. However, over the past decade, ASX has faced increasing calls from the federal government, regulators, and industry bodies for more competition. In response to these calls, ASX attempted to deliver a world-leading new clearing system, based on blockchain. However, after several years of delays and cost overruns, this project has been shelved, which has renewed discussion on opening up the clearing and settlement market to more competition. ASX, we believe, will therefore focus on trying to demonstrate to the federal government, regulators, and industry bodies that it is capable of maintaining smooth operations of Australia’s financial infrastructure, including by increasing spending on its various systems. Regardless of the potential regulatory outcome, cash equity clearing and settlement make up only around 15% of ASX’s revenue. Moreover, we believe that even if cash equity clearing and settlement would be opened up to competition that ASX’s business would remain well protected due to network effects inherent in ASX’s clearing business. We therefore do not expect significant changes to ASX’s cash equity clearing and settlement market share or margins in the foreseeable future.

We maintain our AUD 75 per share fair value estimate for wide-moat ASX following its investor forum. Management provided guidance for medium-term expenditure growth, which disappointed markets. Shares traded down about 8% through the day. We remain confident that ASX will be able to return to historical operating margins over time but have pushed out the timeline for the start of margin recovery to fiscal 2027 from fiscal 2026 previously. At current prices, ASX shares screen as materially undervalued.

We expect Australian Securities Exchange's near- and medium-term strategic focus to be on protecting its economic moat in cash equity clearing and settlement. ASX has long been protected from competition through various exclusive licences to clearing and settlement, which we consider a source of its economic moat, based on intangibles. However, over the past decade, ASX has faced increasing calls from the federal government, regulators, and industry bodies for more competition. In response to these calls, ASX attempted to deliver a world-leading new clearing system, based on blockchain. However, after several years of delays and cost overruns, this project has been shelved, which has renewed discussion on opening up the clearing and settlement market to more competition. ASX, we believe, will therefore focus on trying to demonstrate to the federal government, regulators, and industry bodies that it is capable of maintaining smooth operations of Australia’s financial infrastructure, including by increasing spending on its various systems. Regardless of the potential regulatory outcome, cash equity clearing and settlement make up only around 15% of ASX’s revenue. Moreover, we believe that even if cash equity clearing and settlement would be opened up to competition that ASX’s business would remain well protected due to network effects inherent in ASX’s clearing business. We therefore do not expect significant changes to ASX’s cash equity clearing and settlement market share or margins in the foreseeable future.

We raise our fair value estimate for wide-moat ASX by 3% to AUD 75 per share following its first-half results. Management commentary increased our confidence that ASX can return to historic operating margins, although exact timelines are still unclear. We expect operating margins to start recovering in fiscal 2026. ASX shares continue to trade materially below our fair value estimate as the market focuses on near-term expense and capital expenditure growth.

We expect Australian Securities Exchange's near- and medium-term strategic focus to be on protecting its economic moat in cash equity clearing and settlement. ASX has long been protected from competition through various exclusive licences to clearing and settlement, which we consider a source of its economic moat, based on intangibles. However, over the past decade, ASX has faced increasing calls from the federal government, regulators, and industry bodies for more competition. In response to these calls, ASX attempted to deliver a world-leading new clearing system, based on blockchain. However, after several years of delays and cost overruns, this project has been shelved, which has renewed discussion on opening up the clearing and settlement market to more competition. ASX, we believe, will therefore focus on trying to demonstrate to the federal government, regulators, and industry bodies that it is capable of maintaining smooth operations of Australia’s financial infrastructure, including by increasing spending on its various systems. Regardless of the potential regulatory outcome, cash equity clearing and settlement make up only around 15% of ASX’s revenue. Moreover, we believe that even if cash equity clearing and settlement would be opened up to competition that ASX’s business would remain well protected due to network effects inherent in ASX’s clearing business. We therefore do not expect significant changes to ASX’s cash equity clearing and settlement market share or margins in the foreseeable future.

We maintain our AUD 72.50 per share fair value estimate for wide-moat ASX following its annual general meeting. As expected, ASX leadership reiterated its focus on retaining and securing its social and regulatory licenses, with CEO Helen Lofthouse describing ASX’s licenses as some of their “most important assets.” ASX shares continue to trade materially below our fair value estimate as the market remains concerned with near-term expenses and capital expenditure growth. We believe these near-term expenses do not impede ASX’s long-term earnings potential.

We lower our fair value estimate for wide-moat-rated ASX by 3% to AUD 72.50 following its full-year results. ASX reported underlying earnings of 254 cents per share, a 3% decrease from the prior year and 6% below our forecast on higher-than-expected costs. At current prices, ASX shares trade materially below our fair value estimate. We believe the market is overly focused on near-term growth in expenses and capital expenditures, while we view these as vital investments to secure ASX’s long-term economic moat.

This note replaces the original, published June 6, 2023, which showed incorrect forecast data. Our dividend forecast is AUD 2.43 per share for fiscal 2023, corrected for a 90% payout ratio of underlying EPS of AUD 2.80 per share. Our forecast reflects a dividend yield of 3.3% based on our fair value estimate. Our dividend forecasts for fiscal 2024 and 2025 are AUD 2.37 per share and AUD 2.53 per share, respectively, representing an 85% payout ratio of underlying EPS of AUD 2.79 per share and AUD 2.98 per share, respectively.

We retain our fair value estimate for wide-moat ASX at AUD 75 per share following its investor day. ASX’s share price fell 10% on the prospects of increased operating expenses and capital expenditure. We view this reaction as incorrect and now consider shares in ASX to be materially undervalued.

We expect ASX to deliver a low-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. We don't expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. We expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences our medium fair value uncertainty rating.

Wide-moat-rated ASX Limited’s first-half financial result was relatively weak but broadly in line with our expectations. We’ve made minor adjustments to our short-term earnings forecasts, but our long-term forecasts are largely unchanged. We’ve increased our fair value estimate slightly, to AUD 60 per share, based on broadly similar earnings forecasts combined with the time-value-of-money uplift. However, at the current market price of AUD 70.05, ASX still looks overvalued, despite falling 23% since its record high last September.

We expect ASX to deliver a low-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. We don't expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. We expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences our medium fair value uncertainty rating.

Wide-moat rated ASX Limited has had a tough start to fiscal 2021. The share price has fallen 22% since it reached its all-time high of AUD 91 last September and has significantly underperformed the 10% increase in the S&P/ASX 200 Index over the same period. The share price peak coincided with a peak in ASX’s 1-year forward P/E ratio, at 36 versus an average P/E of 21 over the past decade. Interestingly, the ratio of AXS’s P/E ratio to the S&P/ASX 200 index, peaked at over 2 last March and has since fallen to 1.4, which is equal to its average over the past decade. We’re not surprised by the share price weakness considering ASX has exceeded our AUD 59 fair value estimate for some time.

We expect ASX to deliver a low-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. We don't expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. We expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences our medium fair value uncertainty rating.

We have maintained our fair value estimate for wide-moat ASX Limited at AUD 59.00 per share following its strong fiscal 2020 financial result. The 9% increase in revenue was better than our 6% forecast and reflected strong growth across the business, particularly from cash equity trading and secondary capital raisings due to coronavirus-related market volatility in the second half. However, second-half volatility and trading volumes were the highest they’ve ever been and we expect a normalisation of markets and weaker revenue in fiscal 2021, despite a likely resurgence of IPOs.

We expect ASX to deliver a mid-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. We don't expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. We expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences our medium fair value uncertainty rating.

Wide moat rated ASX continues to look overvalued despite the strong market rebound following the coronavirus related sell-off. We’ve increased our fair value estimate by 4% to AUD 59.00 per share to reflect the time value of money impact on our financial model. However, at the current market price of AUD 85.51, the shares still look expensive.

We have maintained our earnings forecasts and fair value estimate for wide-moat ASX Limited at AUD 57.00 per share following its interim financial result, which was in line with our expectations. The ASX’s share price has performed well in recent years, increasing by over 100% over the past five years despite reasonably steady mid-single-digit annual EPS growth. Over the same period, the P/E ratio has increased to 33 from 18, which we expect is largely due to the fall in interest rates and associated asset yield compression. At the current market price of AUD 84.26, we continue to believe ASX is significantly overvalued. We forecast an EPS CAGR of 4% over the next decade, versus 3% over the past decade, and a weighted average cost of capital of 7.5%.