ASX Limited (ASX)
HOLD

Ultimately lacking ambition

 6 Jun 2023
Sector: Financials

INVESTOR DAY

Need To Know

  • J-curve payoff. Higher costs for longer. Medium term ambition to return to 13.0-14.5% ROE
  • CAPEX across FY23/24 in-line with market. We see upside risks to this spend. CHESS replacement design is not yet finalised
  • We expect EPS downgrades for FY24/25 of high single digits given higher cost base. Dividend downgrades as well 

ASX’s first investor day for new CEO Helen Lofthouse leaves investors with a ‘J-curve’ returns payoff.

The ASX is in catchup mode on CHESS replacement, which is going to hamper the ability of the Group to display positive operating leverage over FY24E/25E.

Cost growth guidance for FY24E of 12-15% is well above market estimates of high single-digit cost growth. A key part of the cost growth is the development and commissioning of the CHESS replacement system which remains a work in progress.

ASX is facing pressure from regulators and clients to ensure a successful upgrade. Shareholders will need to be patient. The dividend payout ratio has become more flexible, ranging from 80-90% instead of a fixed 90% as in the past. It is likely that cuts to consensus estimates for DPS will be greater than EPS for FY24E/25E.

Our initial impression is that ASX has provided a credible plan for upgrading CHESS. However, the final design and function will not be determined until 4Q23.

Overall, we find the strategy lacking ambition. The ASX's "J Curve payoff" only brings the return on equity (ROE) back to historical levels. Considering the stock's premium valuation compared to global peers, it is still too early to consider a more positive rating on ASX.

Investment View

We rate the ASX a Hold. ASX’s earnings multiple has de-rated by a third since the beginning of 2022. Despite the improved valuation appeal, ASX trades at a premium to global peers whilst offering low-single digit earnings growth, well below the growth of global exchange rate peers. 

Uncertainty around the regulatory environment and ASX’s free-cash flow profile leave the ASX with an unusually high-level of earnings risk. A positive stance on the ASX would require; 1) evidence of improved Futures volumes from currently depressed levels (25% of revenue); 2) a refreshed, credible CHESS 2.0 program; 3) clarity on regulatory and structural separation concerns; and 4) improvement in volumes – particularly IPO activity.

Figure 1: New ROE target of 13-14.5% lacks ambition relative to ASX’s historical return profile 

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ASX is an Australian exchange that operates markets for equities, fixed income, commodities, and energy. It provides various services including trading, clearing, settlement, and registry, as well as central counterparty clearing services. 

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