ASX Limited could be hidden value
They turned the goldmine and into a clowncar
ASX limited (”ASX”) shares have declined substantially below historical ranges at a price to sales of 8x (11x mean) and dividend yield of 4.2% (3.7% mean). When the most valuable piece of financial markets infrastructure in Australia goes on sale, it’s a situation that demands my attention.
ASX is a dominant and wonderful business
ASX is Australia’s dominant “financial market infrastructure operator”, providing services across the entire exchange ecosystem; listing, trading, clearing, settlement, and data. The ASX was created when all six Australian state stock exchanges merged in 1987. It continued to be mutually owned until it was re-organised into a company and listed in 1998.
ASX has very diverse sources of revenue, spread across the exchange ecosystem each of which benefit from their own substantial competitive advantages. ASX also benefits from structural tailwinds, like Australia’s compulsory Superannuation system, where employers are required to contribute 12.5% of an employee’s base pay to a retirement account (much of which is invested in markets that ASX operates). Superannuation represents a guaranteed flow of funds into the Australian share and debt markets, boosting ASX’s revenues and profits in the future.
A bungled upgrade and regulator’s scorn
However, ASX’s shares are down substantially, indicating there are significant (or potential) developments that threaten to lower the value of ASX’s business. The primary development that threatens ASX’s business value is a deteriorating relationship with its most important stakeholder; the Australian corporate regulator ASIC.
It appears, that having a virtual monopoly across all of its services, the management of ASX seems to have gotten sloppy, and ASIC weren’t impressed. Since 2016, ASX has been investing hundreds of millions of dollars implementing a replacement to the (now 30 year old) CHESS ledger system. While this is a high-risk project, where one would anticipate significant delays and cost overruns, the 10 years and 2 CEOs the project has claimed highlight the degree of mismanagement. It could be argued, the disaster that has been this project, eroded ASIC’s faith in ASX as steward of “essential financial market infrastructure” and caused it to invite competitors into ASX’s services by granting market licenses to new competitors. ASIC has also stepped-up its level of scrutiny, resulting in a formal inquiry and ended in the 2024 court proceedings against the company for “alleged misleading statements”.
In failing to execute this much needed service upgrade, ASX is now burdened with more competition and higher costs and investment (lower profitability), however the consequences for future failures may be higher still. To date, licenses granted to new entrants and regulatory penalties, threaten only slight long-term damage to ASX’s business, so I would characterise these actions as firm “warning shots”. For example, in 2024 ASIC granted a “clearing and settlement” licence to FinClear but the terms of the license have restricted its operations to private company share transactions (a tiny pond in comparison to publicly listed shares or futures markets).
The risk is in the trend…
While penalties so far haven’t caused carnage, investors have clearly been spooked by the trend of these changes, as they have each made ASX a less valuable business. For example, in their May update to investors, ASX forecast large operating cost increases equal to 12% of the previous year’s profits. These operating cost increases are (in part), to remedy shortcomings in light of regulatory investigations but are also largely driven by inflation in technology costs and growth initiatives. It is notable that management flagged they expect return on equity to be around 0.5% lower versus previous estimates, however whether these revisions reflect the new CEO’s cautious approach or a deterioration in the operating environment I feel is uncertain.
It’s an interesting stock to research
For now I think this is an interesting company to spend some time researching in detail. The valuation looks very low, and from what I have read, they hold a very strong position in all their businesses, even after the protracted regulatory onslaught.
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NOTE - None of the above should be considered or relied upon as financial advice. Discussions, analyses and comparisons are limited in nature and do not take into full account the relevant information and circumstances of the companies and securities involved. While I do my best to ensure the content of my writing is accurate and relevant I cannot guarantee either. Please consult a financial advisor before making any investment decisions.