ASX: Investor Day Shows Management Commitment To Retain Social License and Protect Moat (Corrected)

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 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.

ASX’s new management is demonstrating a strong and decisive commitment to retaining its social license, which we view as exactly the right decision. ASX has been under intense regulatory scrutiny after its failure to deliver a replacement for its aging Clearing House Electronic Subregister System, or Chess. This could eventually result in ASX losing its various legal monopolies, such as in cash equity clearing and settlement, which we consider a source of its economic moat, based on intangibles. By significantly increasing its spending, ASX is demonstrating to regulators, market participants, and broader society that it is committed to delivering value to Australia’s financial ecosystem. The fact that the share price declined on the announcement, we believe, paradoxically, provides evidence that the level of spending it announced was appropriate to retain its social license.