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Date : 21/06/2023




Market Cap : $11.97 Billion

Dividend Per Share : $2.36

Dividend Yield : 3.78 %


52 Week Range : $59.060 - $90.610

Share Price : $62.50

ASX is a monopoly with resiliant earnings and healthy dividends. We upgrade to 'Buy' at current prices.

Company Analysis

ASX Ltd (ASX: ASX) was trading at over $90 a share in November 2021, leading to us recommending members to Avoid it. Inflated costs, failed Chess replacement project, and weak volumes during the market downturn have posed considerable headwinds on the share price, leading to ASX shares shedding 33% and now trading at $62.50 apiece. We think current prices represent good value for the long-term investor, and the headwinds should also start subsiding – easing the pressure off the share price.

The ASX is a monopoly and therefore requires minimal growth capital. This allows the company to consistently payout healthy dividends. At current prices, ASX shares trade with a fully franked trailing annual yield of ~3.8%. The company’s earnings are tied to market trading volumes, and with markets now starting to bounce back, trading volumes will slowly begin recovering, taking pressure off.

1H23 Result Showed Resilience Despite Headwinds

The ASX showcased a resilient financial performance in the first half of 2023, driven by steady operating revenue of $499.5 million across its four lines of business. The period’s statutory profit amounted to $73.7 million. Underlying net profit after tax (NPAT) remained relatively stable, reaching $250 million, representing a marginal decline of 0.1% compared to the previous year. The result was broadly in-line with expectations, and given the significant organisational changes and external volatility that accompanied the period, this result indicates that the tide is turning.

Throughout the first half, ASX’s operating revenue experienced only a slight decrease of 0.4%, a testament to the strength of its diversified operating model that effectively navigated increased market volatility, rapid global inflation, and tightening monetary policies in major markets. Notwithstanding this overall trend, listings revenue increased by 5.4% to $109.7 million, while Technology and Data revenue grew by 8.3% to $117.5 million. ASX also enjoyed a robust rise in net interest income as it is a benefactor of the high-interest environment. However, Markets revenue declined by 2.2% to $138.8 million, and revenue in the Securities and Payments business experienced a decrease of 9.1%, amounting to $133.5 million.

Total expenses rose by 6.8%, primarily driven by additional resource commitments to technology, risk management, and customer activities. Employee wages represented 31% of 1H23 expenses. Nonetheless, this increase was partially offset by a lower depreciation charge.

Source: ASX

ASX’s interest income is well-placed in a rising rate environment. During the period, beyond its operational activities, ASX benefitted from the higher rate environment via interest income generated from clients’ collateral cash balances. 1H23 net interest income was up 50.4% on pcp and represented ~13% of Group earnings. Consequently, annualised 1H23 earnings per share was 3.9% higher on the pcp to $2.62 and adequately covered dividends. The ASX maintained its 90% payout ratio of underlying NPAT, and an interim dividend payment of $1.162 per share was declared.

The balance sheet of ASX is strong, with ~6 million in cash and another ~6 million in short-term investments. They have negligible amounts of long-term debt of $51,500, earning them a long-term rating of AA- by S&P.

While management did not provide guidance back then, they did reaffirm that expenses would remain inflated by 10-12% for FY23. The markets have long priced this in, and we are now seeing a few positive changes on the inflation front. The job market is easing as migration is running at capacity, and inflation has looked like it has peaked. A couple of interest rate hikes do remain in the pipeline, and rates should remain high, at least for the entirety of the year. This has a double positive effect on the ASX:

  • The high-interest rates will once again ensure healthy interest income, offsetting cost pressures.
  • With inflation expected to come down and the job market expected to loosen, cost pressures should gradually start to ease in the medium term.

Therefore, we think that the tide is turning, and the headwinds are beginning to change into tailwinds.

ASX was oversold due to the Chess Replacement Project’s Disaster

Recent investor sentiment surrounding ASX has been largely influenced by the failure to launch the blockchain technology solution intended to replace the current Chess system. After multiple delays and setbacks, ASX has ultimately decided to abandon the project, which spanned over seven years. The failure has had significant financial implications, resulting in write-offs and negative reactions from investors.

ASX incurred a write-off of approximately $252 million and may potentially need to compensate trading firms that invested at least $100 million in their own upgrades for the experimental clearing and settlement project. The project faced numerous challenges identified in a damning report by Accenture, including uncertain timelines, communication issues with technology vendor Digital Asset, and excessive complexity. The management has clearly dropped the ball, and markets have taken note and acted. However, as is the case in the current market environment, sell-offs are more often than not overdone. We think this is the case with the ASX (more on this later).

In contrast, the existing Chess system has proven its reliability and adherence to regulatory requirements, consistently servicing the market effectively. Ongoing investments have allowed the system to handle up to 10 million trades per day, well above the current daily average of 2.8 million. Even during the peak of the COVID pandemic, the system successfully processed a record-breaking 7 million trades in a single day, with several days seeing volumes of around 5 million. This demonstrates the system’s ability to manage significant increases in trading volume.

Due to recent improvements in capacity and resilience, the current Chess system will continue to provide reliability, robustness, and support. What does this mean? ASX’s earnings resilience will continue. However, ASX is continuing to press on with its plan to replace the Chess system. This stems from the intention to develop a new, contemporary platform that offers enhanced flexibility and scalability to meet the evolving needs of the Australian market.

There is now hope that a new “solution design” will be announced in the December quarter of this year, although ASX’s track record of meeting targets in this regard is not exemplary. The abandonment of the replacement system provides ASX with an opportunity for a fresh start in developing plans for the new platform.

It is worth noting that ASX’s earnings remain resilient, and no earnings downgrade is expected. Consequently, the sell-off can be attributed mainly to the Chess replacement failure. Therefore, current prices present an opportunity to enter a position before new plans are unveiled, potentially unlocking future upside with the realisation of a successful new project.

ASX’s Dividends Will Remain Healthy

Earlier this month, ASX held its first Investor Day, releasing a new five-year strategy and providing updated financial guidance. The five-year strategy includes a near-term focus on an expanded technology modernisation program and ongoing regulatory commitments. The financial guidance included the following:

Total expense growth guidance of approximately 12% for FY23 and 12% – 15% for FY24

  • FY23 expense is driven by Chess related regulatory and assurance costs and CHESS replacement solution design,
  • FY24 expenses will support the ‘reset’ horizon of the five-year strategy and ongoing regulatory and technology modernisation costs,
  • Expected reduction in expense growth rate in FY25.

Capital expenditure guidance of approximately $95m for FY23 and $110 – $140m for FY24

  • FY23 is below the guidance range previously provided
  • FY24 capex is supporting technology modernisation and regulatory and risk plans through delivery capability and program governance uplift work.

With capex going up, the company has had to make a couple of tough calls to ensure it has enough funding. ASX has decreased its dividend payout ratio in FY24 from the historical 90% to a range between 80-90%. Additionally, the ASX will look to issue corporate bonds in 1H24 to raise anywhere between $200-$300 million. These two are the other reasons why the ASX share price took a beating this month.

Markets have currently priced in $1.01 billion in revenues for FY23 and $1.06 billion in FY24, representing a growth of ~4.5%. However, with cost pressures still affecting ASX, the bottom line is expected to remain flat. Consensus expects ASX to report an EPS of $2.59 and $2.61 in FY23 and FY24, respectively. Based on the 90% payout ratio for FY23, we can expect total dividends in FY23 to be $2.33. At current prices, this represents an FY23 forward yield of 3.76%.

For the following financial year, if we assume ASX pays the midpoint of its target range, we can expect FY24 dividends to be $2.21 – which is around 3.5% in FY24 implied dividend yield. The fact that ASX’s revenues and earnings are very consistent and that there is a high degree of certainty in its delivery means that it provides very good stability in dividends, despite an evolving and highly volatile market environment.

The decrease in dividends is not much, and the issuance of bonds to raise debt does not alter the financial strength of the ASX.

ASX’s P/E is at its Lowest in the Past 4 years

Based on consensus forecasts for revenues and earnings we just outlaid, ASX shares are currently trading at a P/E of ~23x for FY23 and FY24. This is a level last seen in December 2018. At its peak, ASX shares were trading at 36x P/E, when we recommended avoiding it.

The pandemic introduced a lot of investors and traders to the market. This is evident in the trading volumes. Before the COVID-19 pandemic, ASX trading volumes averaged around 2.8 million trades per day. However, during the pandemic, there was a significant surge in trading activity. On certain days, the trading volume reached an all-time peak of 7 million trades, while several other days saw volumes of approximately 5 million trades. The current average is back to around 2.8 million (as of ASX’s 1H23 report). The reason for the decline is the volatile markets, where investors, particularly retail investors, are inclined to sell out and leave the market.

While we can all debate around the timing of the return to a bull market, what we can all agree on is that it will eventually return. This will, of course, bring back a significant number of market participants – leading to increased volumes for the ASX and, consequently, increased earnings. As a monopoly, ASX is sure to benefit, and as such, we will eventually see its P/E take off once again towards its long-term average of ~29x.

The biggest factor holding back ASX is the failed Chess replacement. As we said earlier, we think a fresh strategy should renew investor sentiment. If ASX’s management fails to deliver on Chess replacement once again, the company could once again be subject to potential M&A takeovers.

Therefore, there is potential for share price growth in the short and medium term. In the long term, the ASX will continue growing as trading volumes will only increase with more market participants. Current forward P/E levels represent a good opportunity for investors.

Source: S&P Capital IQ


The ASX is a monopoly. However, the share price has been affected primarily by the Chess Replacement Project’s decommissioning and inflated costs. It incurred a financial hit, and a massive re-rating in the share price followed. Further, the ASX unveiled plans to allocate capital to its new plan, which is set to be unveiled in the December quarter. The ASX has been punished in the market, and we think it is in the oversold territory. The company’s earnings have remained and are forecasted to remain resilient, the new strategy will give the company a fresh start, and despite the capital allocation, dividends are set to remain healthy with a yield of 3.5%. ASX shares are also trading at a 4-year low P/E of 23x. As such, we recommend investors ‘Buy‘ ASX Ltd.



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