ASX: Focus Remains on Retaining and Securing Social and Regulatory Licenses

We maintain our AUD 72.50 per share fair value estimate for wide-moat ASX 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 remain impressed with the determination with which the ASX has set out to correct the mistakes of the past. This includes strong accountability measures, such as refreshing leadership, reducing or canceling awards—especially for executives involved in the replacement for the Clearing House Electronic Subregister System, or CHESS—and taking back outstanding equity from the former CEO and former deputy CEO. ASX also undertook to engage market participants through an incentive scheme for the next phase of the CHESS replacement project, totaling up to AUD 70 million. Most importantly, however, ASX is investing heavily into its systems, which management reiterated during the meeting.

We view ASX’s near-term investments as supportive of its long-term earnings potential. Primarily, we see these investments as increasing the likelihood that market participants will have a favorable view of ASX’s ability to provide satisfactory exchange infrastructure for Australia’s capital markets, and in turn, that regulators will allow ASX to retain its various exclusive licenses, which we view as an intangible asset supporting its economic moat. Additionally, we believe the opportunity for ASX to invest in exchange technology, which is a highly mature technology, is not infinite. We therefore believe current spending is a pull forward of investment from future years, leaving room for reduced spending and higher margins in the future.