ASX: Investor Day Shows New Management Commitment To Retain Social License and Protect Moat

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.

Management is now guiding to expense growth (excluding significant items) of 12% in fiscal 2023 and 12%-15% in fiscal 2024. Similarly, management is guiding for increased capital expenditure for the medium term. Our forecasts were mostly in line with management guidance, as we expected increases in spending in the near and medium term to placate regulatory concerns. We have, however, slightly revised up our expense forecasts for fiscal 2024 and lowered our expense forecasts from fiscal 2026, to reflect likely short and sharp expenses growth versus slow and protracted expenses growth.