Company Reports

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%.

We don’t expect wide-moat-rated ASX’s strategy of targeting technology company listings to materially increase the number of companies listed on the Australian Securities Exchange. Although the media recently reported that ASX has created the "Aussie Nasdaq," we think this view is extremely premature and needs to be put into context.

Wide-moat rated ASX Limited reported a good fiscal 2019 result with underlying EPS up 8% on a like-for-like basis and broadly in line with our forecast. However, we have increased our fair value estimate by 10% to AUD 57 per share due to a combination of the time-value-of-money effect on our financial model and higher earnings forecasts. The largest valuation boost relates to how we recognise ASX owned cash balances in our model. We previously only recognised distributable cash, as a surplus asset available to shareholders, whereas we now also include non-distributable cash, by including the interest it generates in our EBIT forecasts.

Wide-moat-rated ASX Limited’s share price continues to shoot higher and is up 55% over the past two years. However, we attribute share price growth more to falling interest rates than a material improvement in ASX’s earnings growth outlook. Over the past decade, ASX has generated an EPS CAGR of just 1.9% and we forecast an EPS CAGR of only 4.4% over the next decade. The combination of a rising share price and largely unchanged EPS forecasts has been an expansion in ASX’s one-year forward price/earnings ratio from 23 to 33 or, looked at another way, the EPS yield has contracted from 4.3% to 3.0%. However, at the current share price, we think investors are settling for investment returns which are too low, and we continue to believe the stock is materially overvalued relative to our AUD 52.00 fair value estimate.

We expect wide-moat-rated ASX to use the AUD 385 million raised from the sale of its 18.6% stake in IRESS to pay a fully franked special dividend. This may enable franking credits to be distributed ahead of a potential change in legislation, should the Labor Party win the next federal election, which is likely to be held in May. However, the company has yet to clarify the intended use of the funds. Considering the strength of ASX’s balance sheet and cash flow generation, we don’t think the company either needs the funds nor do we expect the funds to be used for merger and acquisition activity. We make no change to our AUD 52 fair value estimate and continue to believe the shares are overvalued.